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PROVIDENT FINANCIAL HOLDINGS INC - Quarter Report: 2019 March (Form 10-Q)

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

FORM 10-Q
(Mark One)
[X] 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
   For the quarterly period ended
March 31, 2019
 
[   ] 
   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.  [X]  Yes   [   ]  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  [X]  Yes   [  ]  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  [X]    
Non-accelerated filer [   ]                  Smaller reporting company [X]           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  [X]  No
 

Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading
Symbol(s)
 
 
Name of each exchange on which registered
Common stock, par value $0.01 per share
 
PROV
 
The NASDAQ Stock Market LLC


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.
As of May 3, 2019 there were 7,497,357 shares of the registrant's common stock, $0.01 par value per share, outstanding.

     
     

PROVIDENT FINANCIAL HOLDINGS, INC.
Table of Contents
PART 1  -
FINANCIAL INFORMATION
Page
       
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:
 
       
 
Condensed Consolidated Statements of Financial Condition
 
   
as of March 31, 2019 and June 30, 2018
 
Condensed Consolidated Statements of Operations
 
   
for the Quarters and Nine Months Ended March 31, 2019 and 2018
 
Condensed Consolidated Statements of Comprehensive Income
 
   
for the Quarters and Nine Months Ended March 31, 2019 and 2018
 
Condensed Consolidated Statements of Stockholders' Equity
 
   
for the Quarters and Nine Months Ended March 31, 2019 and 2018
 
Condensed Consolidated Statements of Cash Flows
 
   
for the Nine Months Ended March 31, 2019 and 2018
 
Notes to Unaudited Interim Condensed Consolidated Financial Statements
       
ITEM 2  -
Management's Discussion and Analysis of Financial Condition and Results of Operations:
 
       
 
General
50 
 
Safe-Harbor Statement
51 
 
Critical Accounting Policies
52 
 
Executive Summary and Operating Strategy
53 
 
Off-Balance Sheet Financing Arrangements and Contractual Obligations
55 
 
Comparison of Financial Condition at March 31, 2019 and June 30, 2018
55 
 
Comparison of Operating Results
 
   
for the Quarters and Nine Months Ended March 31, 2019 and 2018
57 
 
Asset Quality
68 
 
Loan Volume Activities
77 
 
Liquidity and Capital Resources
78 
 
Supplemental Information
80 
       
ITEM 3  -
Quantitative and Qualitative Disclosures about Market Risk
80 
       
ITEM 4  -
Controls and Procedures
84 
       
PART II  -
OTHER INFORMATION
 
       
ITEM 1  -
Legal Proceedings
85 
ITEM 1A -
Risk Factors
85 
ITEM 2  -
Unregistered Sales of Equity Securities and Use of Proceeds
85 
ITEM 3  -
Defaults Upon Senior Securities
86 
ITEM 4  -
Mine Safety Disclosures
86 
ITEM 5  -
Other Information
86 
ITEM 6  -
Exhibits
86 
       
SIGNATURES
89 


.
PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Financial Condition
(Unaudited)
In Thousands, Except Share Information
 
   
March 31,
2019
   
June 30,
2018
 
Assets
           
   Cash and cash equivalents
 
$
61,458
   
$
43,301
 
   Investment securities – held to maturity, at cost
   
102,510
     
87,813
 
   Investment securities – available for sale, at fair value
   
6,294
     
7,496
 
   Loans held for investment, net of allowance for loan losses of
 $7,080 and $7,385, respectively; includes $5,239 and $5,234 at fair value, respectively
   
883,554
     
902,685
 
   Loans held for sale, at fair value
   
30,500
     
96,298
 
   Accrued interest receivable
   
3,386
     
3,212
 
   Real estate owned, net
   
     
906
 
   Federal Home Loan Bank ("FHLB") – San Francisco stock
   
8,199
     
8,199
 
   Premises and equipment, net
   
8,395
     
8,696
 
   Prepaid expenses and other assets
   
15,099
     
16,943
 
                 
          Total assets
 
$
1,119,395
   
$
1,175,549
 
                 
Liabilities and Stockholders' Equity
               
                 
Liabilities:
               
   Non interest-bearing deposits
 
$
90,875
   
$
86,174
 
   Interest-bearing deposits
   
786,009
     
821,424
 
          Total deposits
   
876,884
     
907,598
 
                 
   Borrowings
   
101,121
     
126,163
 
   Accounts payable, accrued interest and other liabilities
   
20,181
     
21,331
 
          Total liabilities
   
998,186
     
1,055,092
 
                 
Commitments and Contingencies  (Notes 7 and 11)
               
                 
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;
 18,064,365 and 18,033,115 shares issued; 7,497,357 and
 7,421,426 shares outstanding, respectively)
   
181
     
181
 
   Additional paid-in capital
   
96,114
     
94,957
 
   Retained earnings
   
191,103
     
190,616
 
   Treasury stock at cost (10,567,008 and 10,611,689 shares, respectively)
   
(166,352
)
   
(165,507
)
   Accumulated other comprehensive income, net of tax
   
163
     
210
 
                 
          Total stockholders' equity
   
121,209
     
120,457
 
                 
          Total liabilities and stockholders' equity
 
$
1,119,395
   
$
1,175,549
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
In Thousands, Except Per Share Information
 
   
Quarter Ended
March 31,
   
Nine Months Ended
March 31,
   
2019
   
2018
   
2019
    2018  
Interest income:
                     
   Loans receivable, net
 
$
10,011
   
$
9,933
   
$
30,516
   
$
29,825
 
   Investment securities
   
592
     
382
     
1,381
     
958
 
   FHLB – San Francisco stock
   
144
     
144
     
565
     
428
 
   Interest-earning deposits
   
386
     
233
     
1,111
     
591
 
   Total interest income
   
11,133
     
10,692
     
33,573
     
31,802
 
                                 
Interest expense:
                               
   Checking and money market deposits
   
102
     
96
     
327
     
311
 
   Savings deposits
   
139
     
147
     
437
     
445
 
   Time deposits
   
600
     
613
     
1,851
     
1,877
 
   Borrowings
   
680
     
712
     
2,158
     
2,176
 
   Total interest expense
   
1,521
     
1,568
     
4,773
     
4,809
 
                                 
Net interest income
   
9,612
     
9,124
     
28,800
     
26,993
 
Provision (recovery) for loan losses
   
4
     
(505
)
   
(450
)
   
(347
Net interest income, after provision (recovery) for loan losses
   
9,608
     
9,629
     
29,250
     
27,340
 
                                 
Non-interest income:
                               
   Loan servicing and other fees
   
262
     
493
     
863
     
1,173
 
   Gain on sale of loans, net
   
1,719
     
3,597
     
7,114
     
12,761
 
   Deposit account fees
   
471
     
529
     
1,485
     
1,623
 
   Gain (loss) on sale and operations of real estate owned acquired in
     the settlement of loans, net
   
2
     
(19
)
   
(4
)
   
(81
   Card and processing fees
   
373
     
372
     
1,163
     
1,126
 
   Other
   
225
     
238
     
575
     
701
 
   Total non-interest income
   
3,052
     
5,210
     
11,196
     
17,303
 
                                 
Non-interest expense:
                               
   Salaries and employee benefits (1)
   
9,292
     
8,808
     
24,753
     
26,710
 
   Premises and occupancy
   
1,286
     
1,255
     
3,905
     
3,829
 
   Equipment
   
417
     
442
     
1,333
     
1,179
 
   Professional expenses
   
513
     
400
     
1,371
     
1,441
 
   Sales and marketing expenses
   
246
     
213
     
668
     
717
 
   Deposit insurance premiums and regulatory assessments
   
124
     
189
     
461
     
591
 
   Other (2)
   
1,122
     
1,132
     
3,088
     
6,919
 
   Total non-interest expense
   
13,000
     
12,439
     
35,579
     
41,386
 
                                 
Income (loss) before income taxes
   
(340
)
   
2,400
     
4,867
     
3,257
 
Provision (benefit) for income taxes (3)
   
(189
)
   
667
     
1,237
     
2,526
 
   Net income (loss)
 
$
(151
)
 
$
1,733
   
$
3,630
   
$
731
 
                                 
Basic earnings (loss) per share
 
$
(0.02
)
 
$
0.23
   
$
0.49
   
$
0.10
 
Diluted earnings (loss) per share
 
$
(0.02
)
 
$
0.23
   
$
0.48
   
$
0.09
 
Cash dividends per share
 
$
0.14
   
$
0.14
   
$
0.42
   
$
0.42
 
 
.
(1)
Includes $1.5 million of costs associated with staff reductions in mortgage banking operations during the quarter and nine months ended March 31, 2019.
(2)
Includes $3.4 million of litigation settlement expense for the nine months ended March 31, 2018.
(3)
Includes a net tax charge of $1.9 million resulting from the revaluation of net deferred tax assets consistent with the Tax Cuts and Jobs Act for the nine months ended March 31, 2018.
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
In Thousands
 
   
For the Quarters Ended
March 31,
   
For the Nine Months Ended
March 31,
 
   
2019
   
2018
   
2019
   
2018
 
Net income (loss)
 
$
(151
)
 
$
1,733
   
$
3,630
   
$
731
 
                                 
Change in unrealized holding loss on securities available for sale
   
(9
)
   
(35
)
   
(67
)
   
(113
)
Reclassification adjustment for net income (loss) on securities
  available for sale included in net income (loss)
   
     
(2
)
   
     
43
 
Other comprehensive loss, before income taxes
   
(9
)
   
(37
)
   
(67
)
   
(70
)
                                 
Income tax benefit
   
(3
)
   
(13
)
   
(20
)
   
(27
)
Other comprehensive loss
   
(6
)
   
(24
)
   
(47
)
   
(43
)
                                 
Total comprehensive income (loss)
 
$
(157
)
 
$
1,709
   
$
3,583
   
$
688
 
 
 
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
In Thousands, Except Share Information

For the Quarters Ended March 31, 2019 and 2018:
   
Common
Stock
   
Additional
Paid-In
   
Retained 
    Treasury      
Accumulated
Other
Comprehensive
Income (Loss), 
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Stock
   
Net of Tax
   
Total
 
Balance at December 31, 2018
   
7,506,855
   
$
181
   
$
95,913
   
$
192,306
   
$
(165,892
)
 
$
169
   
$
122,677
 
                                                         
Net loss
                           
(151
)
                   
(151
)
Other comprehensive loss
                                           
(6
)
   
(6
)
Purchase of treasury stock
   
(23,748
)
                           
(460
)
           
(460
)
Exercise of stock options
   
11,250
             
164
                             
164
 
Distribution of restricted stock
   
3,000
                                             
 
Amortization of restricted stock
                   
29
                             
29
 
Stock options expense
                   
8
                             
8
 
Cash dividends (1)
                           
(1,052
)
                   
(1,052
)
                                                         
Balance at March 31, 2019
   
7,497,357
   
$
181
   
$
96,114
   
$
191,103
   
$
(166,352
)
 
$
163
   
$
121,209
 

(1)
Cash dividends of $0.14 per share were paid in the quarter ended March 31, 2019.
 
   
Common
Stock
    Additional
Paid-In
     
Retained
     Treasury      
Accumulated
Other
Comprehensive
Income (Loss),
       
 
Shares
   
Amount
   
Capital
   
Earnings
   
Stock
   
Net of Tax
   
Total
 
Balance at December 31, 2017
   
7,474,776
   
$
180
   
$
94,011
   
$
189,610
   
$
(163,311
)
 
$
210
   
$
120,700
 
                                                         
Net income
                           
1,733
                     
1,733
 
Other comprehensive loss
                                           
(24
)
   
(24
)
Purchase of treasury stock (1)
   
(80,972
)
                           
(1,475
)
           
(1,475
)
Exercise of stock options
   
56,500
             
416
                             
416
 
Distribution of restricted stock
   
10,500
                                             
--
 
Amortization of restricted stock
                   
167
                             
167
 
Stock options expense
                   
125
                             
125
 
Cash dividends (2)
                           
(1,042
)
                   
(1,042
)
                                                         
Balance at March 31, 2018
   
7,460,804
   
$
180
   
$
94,719
   
$
190,301
   
$
(164,786
)
 
$
186
   
$
120,600
 

(1)
Includes the repurchase of 3,291 shares of distributed restricted stock in settlement of employee withholding tax obligations.
(2)
Cash dividends of $0.14 per share were paid in the quarter ended March 31, 2018.
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
For the Nine Months Ended March 31, 2019 and 2018:
 
   
Common
Stock
   
Additional
Paid-In
    Retained    
Treasury
     
Accumulated
Other
Comprehensive
Income (Loss),
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Stock
   
Net of Tax
   
Total
 
Balance at June 30, 2018
   
7,421,426
   
$
181
   
$
94,957
   
$
190,616
   
$
(165,507
)
 
$
210
   
$
120,457
 
                                                         
Net income
                           
3,630
                     
3,630
 
Other comprehensive loss
                                           
(47
)
   
(47
)
Purchase of treasury stock (1)
   
(44,819
)
                           
(845
)
           
(845
)
Exercise of stock options
   
31,250
             
390
                             
390
 
Distribution of restricted stock
   
89,500
                                             
 
Amortization of restricted stock
                   
426
                             
426
 
Stock options expense
                   
341
                             
341
 
Cash dividends (2)
                           
(3,143
)
                   
(3,143
)
                                                         
Balance at March 31, 2019
   
7,497,357
   
$
181
   
$
96,114
   
$
191,103
   
$
(166,352
)
 
$
163
   
$
121,209
 

(1)   Includes the repurchase of 21,071 shares of distributed restricted stock in settlement of employee withholding tax obligations.
(2)   Cash dividends of $0.42 per share were paid in the nine months ended March 31, 2019.
 
   
Common
Stock
   
Additional
Paid-In
   
Retained  
    Treasury      
Accumulated
Other
Comprehensive
Income (Loss), 
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Stock
   
Net of Tax
   
Total
 
Balance at June 30, 2017
   
7,714,052
   
$
180
   
$
93,209
   
$
192,754
   
$
(158,142
)
 
$
229
   
$
128,230
 
                                                         
Net income
                           
731
                     
731
 
Other comprehensive loss
                                           
(43
)
   
(43
)
Purchase of treasury stock (1)
   
(347,498
)
                           
(6,627
)
           
(6,627
)
Exercise of stock options
   
83,750
             
677
                             
677
 
Distribution of restricted stock
   
10,500
                                             
--
 
Amortization of restricted stock
                   
458
                             
458
 
Forfeitures of restricted stock
                   
17
             
(17
)
           
 
Stock options expense
                   
358
                             
358
 
Cash dividends (2)
                           
(3,184
)
                   
(3,184
)
                                                         
Balance at March 31, 2018
   
7,460,804
   
$
180
   
$
94,719
   
$
190,301
   
$
(164,786
)
 
$
186
   
$
120,600
 
(1)   Includes the repurchase of 3,291 shares of distributed restricted stock in settlement of employee withholding tax obligations.
(2)   Cash dividends of $0.42 per share were paid in the nine months ended March 31, 2018.
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited - In Thousands)
 
   
Nine Months Ended March 31,
 
   
2019
   
2018
 
Cash flows from operating activities:
           
   Net income
 
$
3,630
   
$
731
 
   Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
      Depreciation and amortization
   
2,045
     
2,229
 
      Recovery from the allowance for loan losses
   
(450
)
   
(347
)
      Recovery of losses on real estate owned
   
     
(552
)
      Gain on sale of loans, net
   
(7,114
)
   
(12,761
)
      (Gain) loss on sale of real estate owned, net
   
(9
)
   
564
 
      Stock-based compensation
   
767
     
816
 
      Provision (benefit) for deferred income taxes
   
553
     
(28
)
   (Decrease) increase in accounts payable, accrued interest and other liabilities
   
(320
)
   
3,294
 
   Decrease (increase) in prepaid expenses and other assets
   
446
     
(482
)
   Loans originated for sale
   
(453,444
)
   
(944,349
)
   Proceeds from sale of loans
   
526,090
     
983,504
 
         Net cash provided by operating activities
   
72,194
     
32,619
 
                 
Cash flows from investing activities:
               
   Decrease in loans held for investment, net
   
19,230
     
8,956
 
   Maturity of investment securities held to maturity
   
800
     
200
 
   Principal payments from investment securities held to maturity
   
24,093
     
17,882
 
   Principal payments from investment securities available for sale
   
1,140
     
1,252
 
   Purchase of investment securities held to maturity
   
(40,282
)
   
(54,147
)
   Proceeds from sale of real estate owned
   
915
     
2,223
 
   Purchase of premises and equipment
   
(151
)
   
(2,713
)
         Net cash provided by (used for) investing activities
   
5,745
     
(26,347
)
                 
Cash flows from financing activities:
               
   Decrease in deposits, net
   
(30,714
)
   
(4,022
)
   Repayments of short-term borrowings, net
   
(15,000
)
   
(15,000
)
   Repayments of long-term borrowings
   
(10,042
)
   
(10,050
)
   Proceeds from long-term borrowings
   
     
10,000
 
   Exercise of stock options
   
390
     
677
 
   Withholding taxes on stock based compensation
   
(428
)
   
(318
)
   Cash dividends
   
(3,143
)
   
(3,184
)
   Treasury stock purchases
   
(845
)
   
(6,627
)
         Net cash used for financing activities
   
(59,782
)
   
(28,524
)
                 
Net increase (decrease) in cash and cash equivalents
   
18,157
     
(22,252
)
Cash and cash equivalents at beginning of period
   
43,301
     
72,826
 
Cash and cash equivalents at end of period
 
$
61,458
   
$
50,574
 
Supplemental information:
               
   Cash paid for interest
 
$
4,796
   
$
4,816
 
   Cash paid for income taxes
 
$
1,555
   
$
2,400
 
   Transfer of loans held for sale to held for investment
 
$
1,360
   
$
1,122
 
   Real estate acquired in the settlement of loans
 
$
   
$
1,659
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements

March 31, 2019

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, 2018 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, 2018.  The results of operations for the quarter and nine months ended March 31, 2019 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2019.


Note 2: Accounting Standard Updates ("ASU")

There have been no accounting standard updates or changes in the status of their adoption that are significant 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, 2018, other than:

ASU 2014-09:
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, "Revenue from Contracts with Customers," which created FASB Accounting Standards Codification (ASC) Topic 606 ("ASC 606"). ASC 606 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASC 606 was effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. The Corporation adopted ASC 606 on July 1, 2018 using the modified retrospective approach. Therefore, the comparative information has not been adjusted and continues to be reported under superseded ASC 605. There was no cumulative effect adjustment as of July 1, 2018, and there were no material changes to the timing or amount of revenue recognized for the nine months ended March 31, 2019; however, additional disclosures were incorporated in the footnotes upon adoption. The majority of the Company's revenue is comprised of interest income from financial assets, which is explicitly excluded from the scope of ASC 606. The Corporation elected to apply the practical expedient pursuant to ASC 606 and therefore does not disclose information about remaining performance obligations that have an original expected term of one year or less and allows the Corporation to expense costs related to obtaining a contract as incurred when the original amortization period would have been one year or less. See Note 12 for additional discussion.

7

ASU 2018-11
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." This ASU introduces a lessee model that brings most leases on the balance sheet and aligns many of the underlying principles of the new lessor model with those in the new revenue recognition standard, ASC 606, Revenue From Contracts With Customers. The new leases standard represents a wholesale change to lease accounting and will most likely result in significant implementation challenges during the transition period and beyond. This ASU will be effective for annual periods beginning after December 15, 2018 (i.e., calendar periods beginning on January 1, 2019), and interim periods therein, early adoption is permitted. In July 2018, the FASB issued ASU 2018-11, Leases, Targeted Improvements, which allows entities the option of initially applying the new leases standard at the adoption date (such as January 1, 2019, for calendar year- end public business entities) and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In January 2019, the FASB issued ASU 2019-01, Codification Improvements. The amendments in this update include the following items: (i) determining the fair value of the underlying asset by lessors that are not manufacturers or dealers; (ii) requiring cash received from lessors from sales-type and direct financing leases to be presented in the cash flow statement within investing activities; and (iii) clarifying interim disclosure requirements. The effective date and transition requirements for the first and second items of this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019 and early adoption is permitted. The effective date and transition requirements for the third item of this ASU are the same as ASU 2016-02. The Corporation plans to adopt these ASUs on July 1, 2019. Management is currently assessing the impact of these ASUs on the Corporation's financial position and results of operations but does not believe that adoption of these ASUs  will have a material impact on its consolidated financial statements.

ASU 2018-13
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which modifies disclosure requirements on fair value measurements to improve their effectiveness. The guidance permits entities to consider materiality when evaluating fair value measurement disclosures and, among other modifications, requires certain new disclosures related to Level 3 fair value measurements. The guidance will be effective beginning January 1, 2020, with early adoption permitted. The guidance only affects disclosures in the notes to the consolidated financial statements and will not affect the Corporation's financial position or results of operations.
 


8
Note 3: Earnings (Loss) Per Share

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

As of March 31, 2019 and 2018, there were outstanding options to purchase 497,750 shares and 529,000 shares of the Corporation's common stock, respectively. Of those shares, as of March 31, 2019 and 2018, there were 497,750 shares and 26,000 shares, respectively, which were excluded from the diluted EPS computation as their effect was anti-dilutive.  As of March 31, 2019 and 2018, there were outstanding restricted stock awards of 9,000 shares and 98,500 shares, respectively. The outstanding restricted stock had no dilutive effect for the quarter ended March 31, 2019 but they were dilutive for the comparable quarter last year.

The following table provides the basic and diluted EPS computations for the quarters and nine months ended March 31, 2019 and 2018, respectively.
   
For the Quarters Ended
March 31,
   
For the Nine Months Ended
March 31,
 
(In Thousands, Except Earnings Per Share)
 
2019
   
2018
   
2019
   
2018
 
Numerator:
                       
   Net income (loss) – numerator for basic earnings per share 
    and diluted earnings per share - available to common 
    stockholders
 
$
(151
)
 
$
1,733
   
$
3,630
   
$
731
 
                                 
Denominator:
                               
   Denominator for basic earnings per share:
                               
    Weighted-average shares
   
7,507
     
7,457
     
7,481
     
7,573
 
                                 
     Effect of dilutive shares:
                               
Stock options
   
     
97
     
60
     
111
 
Restricted stock
   
     
62
     
14
     
53
 
                                 
  Denominator for diluted earnings per share:
                               
    Adjusted weighted-average shares and assumed
     conversions
   
7,507
     
7,616
     
7,555
     
7,737
 
                                 
Basic earnings (loss) per share
 
$
(0.02
)
 
$
0.23
   
$
0.49
   
$
0.10
 
Diluted earnings (loss) per share
 
$
(0.02
)
 
$
0.23
   
$
0.48
   
$
0.09
 


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 Corporation expects to discontinue the operations of PBM by June 30, 2019.  The Corporation estimates that it will incur costs of approximately $3.6 million to $4.0 million to complete the exit during the remainder of fiscal 2019, which amounts include costs for severance, retention, personnel, premises, occupancy, depreciation, and costs related to termination of data processing and other contractual arrangements.  As of March 31, 2019, the total costs incurred for both the quarter and nine months ended March 31 2019 were approximately $1.6 million, comprised of
 
9
$1.5 million in salaries and employee benefits expenses, $81,000 in premises and occupancy expenses and $13,000 in equipment expenses. There were no costs incurred related to the exit prior to the quarter ended March 31, 2019.

The following tables set forth condensed consolidated statements of operations and total assets for the Corporation's operating segments for the quarters and nine months ended March 31, 2019 and 2018, respectively.
   
For the Quarter Ended March 31, 2019
 
(In Thousands)
 
Provident
Bank
   
Provident
Bank
Mortgage
   
Consolidated
Totals
 
Net interest income
 
$
9,431
   
$
181
   
$
9,612
 
Provision (recovery) for loan losses
   
74
     
(70
)
   
4
 
Net interest income, after provision (recovery) for loan losses
   
9,357
     
251
     
9,608
 
                         
Non-interest income:
                       
     Loan servicing and other fees (1)
   
103
     
159
     
262
 
     Gain (loss) on sale of loans, net (2)
   
(1
)
   
1,720
     
1,719
 
     Deposit account fees
   
471
     
     
471
 
     Gain on sale and operations of real estate owned
        acquired in the settlement of loans, net
   
2
     
     
2
 
Card and processing fees
   
373
     
     
373
 
Other
   
223
     
2
     
225
 
          Total non-interest income
   
1,171
     
1,881
     
3,052
 
                         
Non-interest expense:
                       
     Salaries and employee benefits
   
5,002
     
4,290
     
9,292
 
     Premises and occupancy
   
847
     
439
     
1,286
 
     Operating and administrative expenses
   
1,314
     
1,108
     
2,422
 
          Total non-interest expense
   
7,163
     
5,837
     
13,000
 
Income (loss) before income taxes
   
3,365
     
(3,705
)
   
(340
)
Provision (benefit) for income taxes
   
907
     
(1,096
)
   
(189
)
Net income (loss)
 
$
2,458
   
$
(2,609
)
 
$
(151
)
Total assets, end of period
 
$
1,088,716
   
$
30,679
   
$
1,119,395
 

 
(1)
Includes an inter-company charge of $2 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 $17 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.
10
   
For the Quarter Ended March 31, 2018
 
(In Thousands)
 
Provident
Bank
   
Provident
Bank
Mortgage
   
Consolidated
Totals
 
Net interest income
 
$
8,750
   
$
374
   
$
9,124
 
Recovery from the allowance for loan losses
   
(505
)
   
     
(505
)
Net interest income, after recovery from the allowance for loan losses
   
9,255
     
374
     
9,629
 
                         
Non-interest income:
                       
     Loan servicing and other fees (1)
   
313
     
180
     
493
 
     Gain (loss) on sale of loans, net (2)
   
(1
)
   
3,598
     
3,597
 
     Deposit account fees
   
529
     
     
529
 
     Loss on sale and operations of real estate owned
        acquired in the settlement of loans, net
   
(19
)
   
     
(19
)
     Card and processing fees
   
372
     
     
372
 
     Other
   
238
     
     
238
 
          Total non-interest income
   
1,432
     
3,778
     
5,210
 
                         
Non-interest expense:
                       
     Salaries and employee benefits
   
4,763
     
4,045
     
8,808
 
     Premises and occupancy
   
842
     
413
     
1,255
 
     Operating and administrative expenses
   
1,050
     
1,326
     
2,376
 
          Total non-interest expense
   
6,655
     
5,784
     
12,439
 
Income (loss) before income taxes
   
4,032
     
(1,632
)
   
2,400
 
Provision (benefit) for income taxes
   
1,252
     
(585
)
   
667
 
Net income (loss)
 
$
2,780
   
$
(1,047
)
 
$
1,733
 
Total assets, end of period
 
$
1,086,437
   
$
90,165
   
$
1,176,602
 


(1)
Includes an inter-company charge of $222 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 $44 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.
 
11
   
For the Nine Months Ended March 31, 2019
 
(In Thousands)
 
Provident
Bank
   
Provident
Bank
Mortgage
   
Consolidated
Totals
 
Net interest income
 
$
27,956
   
$
844
   
$
28,800
 
Provision (recovery) for loan losses
   
(475
)
   
25
     
(450
)
Net interest income, after provision (recovery) for loan losses
   
28,431
     
819
     
29,250
 
                         
Non-interest income:
                       
     Loan servicing and other fees (1)
   
87
     
776
     
863
 
     Gain on sale of loans, net (2)
   
33
     
7,081
     
7,114
 
     Deposit account fees
   
1,485
     
     
1,485
 
     Loss on sale and operations of real estate owned
        acquired in the settlement of loans, net
   
(4
)
   
     
(4
)
     Card and processing fees
   
1,163
     
     
1,163
 
     Other
   
573
     
2
     
575
 
          Total non-interest income
   
3,337
     
7,859
     
11,196
 
                         
Non-interest expense:
                       
     Salaries and employee benefits
   
14,138
     
10,615
     
24,753
 
     Premises and occupancy
   
2,652
     
1,253
     
3,905
 
     Operating and administrative expenses
   
3,307
     
3,614
     
6,921
 
          Total non-interest expense
   
20,097
     
15,482
     
35,579
 
Income (loss) before income taxes
   
11,671
     
(6,804
)
   
4,867
 
Provision (benefit) for income taxes
   
3,249
     
(2,012
)
   
1,237
 
Net income (loss)
 
$
8,422
   
$
(4,792
)
 
$
3,630
 
Total assets, end of period
 
$
1,088,716
   
$
30,679
   
$
1,119,395
 

(1)
Includes an inter-company charge of $428 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 $37 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.
 
12

   
For the Nine Months Ended March 31, 2018
 
(In Thousands)
 
Provident
Bank
   
Provident
Bank
Mortgage
   
Consolidated
Totals
 
Net interest income
 
$
25,517
   
$
1,476
   
$
26,993
 
Recovery from the allowance for loan losses
   
(347
)
   
     
(347
)
Net interest income, after recovery from the allowance for loan losses
   
25,864
     
1,476
     
27,340
 
                         
Non-interest income:
                       
     Loan servicing and other fees (1)
   
468
     
705
     
1,173
 
     Gain on sale of loans, net (2)
   
21
     
12,740
     
12,761
 
     Deposit account fees
   
1,623
     
     
1,623
 
     Loss on sale and operations of real estate owned
        acquired in the settlement of loans, net
   
(81
)
   
     
(81
)
     Card and processing fees
   
1,126
     
     
1,126
 
     Other
   
701
     
     
701
 
          Total non-interest income
   
3,858
     
13,445
     
17,303
 
                         
Non-interest expense:
                       
     Salaries and employee benefits
   
13,714
     
12,996
     
26,710
 
     Premises and occupancy
   
2,491
     
1,338
     
3,829
 
     Operating and administrative expenses (3)
   
4,490
     
6,357
     
10,847
 
          Total non-interest expense
   
20,695
     
20,691
     
41,386
 
Income (loss) before income taxes
   
9,027
     
(5,770
)
   
3,257
 
Provision (benefit) for income taxes (4)
   
4,595
     
(2,069
)
   
2,526
 
Net income (loss)
 
$
4,432
   
$
(3,701
)
 
$
731
 
Total assets, end of period
 
$
1,086,437
   
$
90,165
   
$
1,176,602
 

(1)
Includes an inter-company charge of $561 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 $182 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.
(3)
Includes $3.4 million of litigation settlement expense for the first nine months of fiscal 2018, of which $2.1 million was allocated to PBM.
(4)
Includes a net tax charge of $1.9 million resulting from the revaluation of net deferred tax assets consistent with the Tax Cuts and Jobs Act for the nine months ended December 31, 2017.



13
Note 5: Investment Securities

The amortized cost and estimated fair value of investment securities as of March 31, 2019 and June 30, 2018 were as follows:
March 31, 2019
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
(Losses)
   
Estimated
Fair
Value
   
Carrying
Value
 
(In Thousands)
                             
Held to maturity:
                             
  U.S. government sponsored enterprise MBS (1)
 
$
99,193
   
$
728
   
$
(163
)
 
$
99,758
   
$
99,193
 
  U.S. SBA securities (2)
   
2,917
     
     
(19
)
   
2,898
     
2,917
 
  Certificate of deposits
   
400
     
     
     
400
     
400
 
Total investment securities - held to maturity
 
$
102,510
   
$
728
   
$
(182
)
 
$
103,056
   
$
102,510
 
                                         
Available for sale:
                                       
  U.S. government agency MBS
 
$
3,677
   
$
119
   
$
   
$
3,796
   
$
3,796
 
  U.S. government sponsored enterprise MBS
   
2,107
     
91
     
     
2,198
     
2,198
 
  Private issue CMO (3)
   
296
     
4
     
     
300
     
300
 
Total investment securities - available for sale
 
$
6,080
   
$
214
   
$
   
$
6,294
   
$
6,294
 
Total investment securities
 
$
108,590
   
$
942
   
$
(182
)
 
$
109,350
   
$
108,804
 

(1)
Mortgage-Backed Securities ("MBS").
(2)
Small Business Administration ("SBA").
(3)
Collateralized Mortgage Obligations ("CMO").

 
June 30, 2018
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
(Losses)
   
Estimated
Fair
Value
   
Carrying
Value
 
(In Thousands)
                             
Held to maturity:
                             
  U.S. government sponsored enterprise MBS
 
$
84,227
   
$
203
   
$
(762
)
 
$
83,668
   
$
84,227
 
  U.S. SBA securities
   
2,986
     
     
(15
)
   
2,971
     
2,986
 
  Certificate of deposits
   
600
     
     
     
600
     
600
 
Total investment securities - held to maturity
 
$
87,813
   
$
203
   
$
(777
)
 
$
87,239
   
$
87,813
 
                                         
Available for sale:
                                       
  U.S. government agency MBS
 
$
4,234
   
$
150
   
$
   
$
4,384
   
$
4,384
 
  U.S. government sponsored enterprise MBS
   
2,640
     
122
     
     
2,762
     
2,762
 
  Private issue CMO
   
346
     
4
     
     
350
     
350
 
Total investment securities - available for sale
 
$
7,220
   
$
276
   
$
   
$
7,496
   
$
7,496
 
Total investment securities
 
$
95,033
   
$
479
   
$
(777
)
 
$
94,735
   
$
95,309
 
 
In the third quarters of fiscal 2019 and 2018, the Corporation received MBS principal payments of $8.6 million and $7.4 million, respectively, and there were no sales of investment securities during these periods.  The Corporation purchased U.S. government sponsored enterprise MBS totaling $26.2 million and $12.4 million, to be held to maturity, respectively. For the first nine months of fiscal 2019 and 2018, the Corporation received MBS principal payments of $25.2 million and $19.1 million, respectively, and there were no sales of investment securities during these periods.  In the first nine months of fiscal
 
14
2019 and 2018, the Corporation purchased U.S. government sponsored enterprise MBS totaling $39.7 million and $50.9 million, to be held to maturity, respectively. In addition, the Corporation also purchased $3.0 million in U.S. SBA loan pool securities to be held to maturity in the third quarter and first nine months of fiscal 2018.

The Corporation held investments with an unrealized loss position of $182,000 at March 31, 2019 and $777,000 at June 30, 2018.
As of March 31, 2019
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
 
$
   
$
   
$
26,758
   
$
163
   
$
26,758
   
$
163
 
  U.S. SBA securities
   
2,892
     
19
     
     
     
2,892
     
19
 
Total investment securities
 
$
2,892
   
$
19
   
$
26,758
   
$
163
   
$
29,650
   
$
182
 

As of June 30, 2018
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
 
$
47,045
   
$
762
   
$
   
$
   
$
47,045
   
$
762
 
  U.S. SBA securities
   
2,964
     
15
     
     
     
2,964
     
15
 
Total investment securities
 
$
50,009
   
$
777
   
$
   
$
   
$
50,009
   
$
777
 

The Corporation evaluates individual investment securities quarterly for other-than-temporary declines in market value. At March 31, 2019, $163,000 of the $182,000 unrealized holding losses were 12 months or more; while at June 30, 2018, all of the unrealized holding losses were less than 12 months. The Corporation does not believe that there were any other-than-temporary impairments on the investment securities at March 31, 2019 and 2018; therefore, no impairment losses were recorded for the quarters and nine months ended March 31, 2019 and 2018.
 
 
15
Contractual maturities of investment securities as of March 31, 2019 and June 30, 2018 were as follows:
   
March 31, 2019
   
June 30, 2018
 
(In Thousands)
 
Amortized
Cost
   
Estimated
Fair
Value
   
Amortized
Cost
   
Estimated
Fair
Value
 
                         
Held to maturity:
                       
Due in one year or less
 
$
200
   
$
200
   
$
600
   
$
600
 
Due after one through five years
   
35,345
     
35,259
     
24,961
     
24,569
 
Due after five through ten years
   
38,691
     
39,126
     
22,847
     
22,477
 
Due after ten years
   
28,274
     
28,471
     
39,405
     
39,593
 
Total investment securities - held to maturity
 
$
102,510
   
$
103,056
   
$
87,813
   
$
87,239
 
                                 
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
   
6,080
     
6,294
     
7,220
     
7,496
 
Total investment securities - available for sale
 
$
6,080
   
$
6,294
   
$
7,220
   
$
7,496
 
Total investment securities
 
$
108,590
   
$
109,350
   
$
95,033
   
$
94,735
 

Note 6: Loans Held for Investment

Loans held for investment, net of fair value adjustments, consisted of the following:
(In Thousands)
 
March 31,
2019
   
June 30,
2018
 
Mortgage loans:
           
     Single-family
 
$
314,824
   
$
314,808
 
     Multi-family
   
449,812
     
476,008
 
     Commercial real estate
   
115,355
     
109,726
 
     Construction (1)
   
4,139
     
3,174
 
     Other
   
167
     
167
 
Commercial business loans (2)
   
483
     
500
 
Consumer loans (3)
   
133
     
109
 
     Total loans held for investment, gross
   
884,913
     
904,492
 
                 
Advance payments of escrows
   
225
     
18
 
Deferred loan costs, net
   
5,496
     
5,560
 
Allowance for loan losses
   
(7,080
)
   
(7,385
)
     Total loans held for investment, net
 
$
883,554
   
$
902,685
 

 
(1)
Net of $6.1 million and $4.3 million of undisbursed loan funds as of March 31, 2019 and June 30, 2018, respectively
(2)
Net of $950 and $495 of undisbursed lines of credit as of March 31, 2019 and June 30, 2018, respectively.
(3)
Net of $481 and $503 of undisbursed lines of credit as of March 31, 2019 and June 30, 2018, respectively.

16
The following table sets forth information at March 31, 2019 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 March 31, 2019 and June 30, 2018.  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
 
$
100,302
   
$
37,514
   
$
102,300
   
$
62,493
   
$
12,215
   
$
314,824
 
     Multi-family
   
125,503
     
162,437
     
145,968
     
15,710
     
194
     
449,812
 
     Commercial real estate
   
44,247
     
33,136
     
36,442
     
1,055
     
475
     
115,355
 
     Construction
   
3,581
     
     
     
     
558
     
4,139
 
     Other
   
     
     
     
     
167
     
167
 
Commercial business loans
   
75
     
     
     
     
408
     
483
 
Consumer loans
   
133
     
     
     
     
     
133
   
     Total loans held for investment,
       gross
 
$
273,841
   
$
233,087
   
$
284,710
   
$
79,258
   
$
14,017
   
$
884,913
 
 
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 loan 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 net 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.
 
17
 
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:
  March 31, 2019  
(In Thousands)
 
Single-
family
   
Multi-
family
   
Commercial
Real Estate
   
Construction
   
Other
Mortgage
   
Commercial
Business
   
Consumer
   
Total
 
                                                 
Pass
 
$
304,403
   
$
445,927
   
$
115,355
   
$
3,394
   
$
167
   
$
430
   
$
133
   
$
869,809
 
Special Mention
   
3,347
     
3,885
     
     
     
     
     
     
7,232
 
Substandard
   
7,074
     
     
     
745
     
     
53
     
     
7,872
 
   Total loans held for
     investment, gross
 
$
314,824
   
$
449,812
   
$
115,355
   
$
4,139
   
$
167
   
$
483
   
$
133
   
$
884,913
 

  June 30, 2018  
(In Thousands)
 
Single-
family
   
Multi-
family
   
Commercial
Real Estate
   
Construction
   
Other
Mortgage
   
Commercial
Business
   
Consumer
   
Total
 
                                                 
Pass
 
$
304,619    
$
 472,061    
$
108,786
   
$
3,174
   
$
167
   
$
430
   
$
109
   
$
889,346
 
Special Mention
   
2,548
     
3,947
     
940
     
     
     
     
     
7,435
 
Substandard
   
7,641
     
     
     
     
     
70
     
     
7,711
 
Total loans held for
   investment, gross
 
$
314,808
   
$
476,008
   
$
109,726
   
$
3,174
   
$
167
   
$
500
   
$
109
   
$
904,492
 
 
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
 
18
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 March 31, 2019 and June 30, 2018:
(In Thousands)
 
March 31, 2019
   
June 30, 2018
 
Collectively evaluated for impairment:
           
   Mortgage loans:
           
      Single-family
 
$
2,514
   
$
2,632
 
      Multi-family
   
3,300
     
3,492
 
      Commercial real estate
   
1,042
     
1,030
 
      Construction
   
63
     
47
 
      Other
   
3
     
3
 
   Commercial business loans
   
18
     
18
 
   Consumer loans
   
8
     
6
 
      Total collectively evaluated allowance
   
6,948
     
7,228
 
                 
Individually evaluated for impairment:
               
   Mortgage loans:
               
      Single-family
   
123
     
151
 
   Commercial business loans
   
9
     
6
 
      Total individually evaluated allowance
   
132
     
157
 
Total loan loss allowance
 
$
7,080
   
$
7,385
 
19
The following table is provided to disclose additional details for the periods indicated on the Corporation's allowance for loan losses:
   
For the Quarters Ended
March 31,
   
For the Nine Months Ended
March 31,
 
(Dollars in Thousands)
 
2019
   
2018
   
2019
   
2018
 
                         
Allowance at beginning of period
 
$
7,061
   
$
8,075
   
$
7,385
   
$
8,039
 
                                 
Provision (recovery) for loan losses
   
4
     
(505
)
   
(450
)
   
(347
)
                                 
Recoveries:
                               
Mortgage loans:
                               
      Single-family
   
22
     
71
     
177
     
203
 
Consumer loans
   
1
     
     
2
     
 
   Total recoveries
   
23
     
71
     
179
     
203
 
                                 
Charge-offs:
                               
Mortgage loans:
                               
      Single-family
   
(6
)
   
(110
)
   
(31
)
   
(364
)
Consumer loans
   
(2
)
   
     
(3
)
   
 
   Total charge-offs
   
(8
)
   
(110
)
   
(34
)
   
(364
)
                                 
   Net (charge-offs) recoveries
   
15
     
(39
)
   
145
     
(161
)
      Balance at end of period
 
$
7,080
   
$
7,531
   
$
7,080
   
$
7,531
 
                                 
Allowance for loan losses as a percentage of gross
  loans held for investment at the end of the period
   
0.79
%
   
0.84
%
   
0.79
%
   
0.84
%
Net charge-offs (recoveries) as a percentage of average
  loans receivable, net, during the period (annualized)
   
(0.01
)%
   
0.02
%
   
(0.02
)%
   
0.02
%

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.
   
March 31, 2019
 
(In Thousands)
 
Current
   
30-89 Days
Past Due
   
Non-Accrual (1)
 
Total Loans Held for
Investment, Gross
                         
Mortgage loans:
                       
Single-family
 
$
308,554
   
$
696
   
$
5,574
   
$
314,824
 
Multi-family
   
449,812
     
     
     
449,812
 
Commercial real estate
   
115,355
     
     
     
115,355
 
Construction
   
3,394
     
     
745
     
4,139
 
Other
   
167
     
     
     
167
 
Commercial business loans
   
430
     
     
53
     
483
 
Consumer loans
   
130
     
3
     
     
133
 
   Total loans held for investment, gross
 
$
877,842
   
$
699
   
$
6,372
   
$
884,913
 

(1)  All loans 90 days or greater past due are placed on non-accrual status.
20
   
June 30, 2018
 
(In Thousands)
 
Current
   
30-89 Days
Past Due
   
Non-Accrual (1)
 
Total Loans Held for
Investment, Gross
                         
Mortgage loans:
                       
Single-family
 
$
307,863
   
$
804
   
$
6,141
   
$
314,808
 
Multi-family
   
476,008
     
     
     
476,008
 
Commercial real estate
   
109,726
     
     
     
109,726
 
Construction
   
3,174
     
     
     
3,174
 
Other
   
167
     
     
     
167
 
Commercial business loans
   
430
     
     
70
     
500
 
Consumer loans
   
108
     
1
     
     
109
 
Total loans held for investment, gross
 
$
897,476
   
$
805
   
$
6,211
   
$
904,492
 

(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 March 31, 2019  
(In Thousands)
 
Single-
family
 
Multi-
family
 
Commercial
Real Estate
 
Construction
 
Other
 
Commercial
Business
 
Consumer
 
Total
 
Allowance for loan losses:
                                 
Allowance at beginning of  period
 
$
2,679
 
$
3,280
 
$
1,019
   
$
48
 
$
3
 
$
26
   
$
6
   
$
7,061
 
Provision (recovery) for loan losses
   
(58
)
 
20
   
23
     
15
   
   
1
     
3
     
4
 
Recoveries
   
22
   
   
     
   
   
     
1
     
23
 
Charge-offs
   
(6
)
 
   
     
   
   
     
(2
     
(8
)
   Allowance for loan losses,
    end of period
 
$
2,637
 
$
3,300
 
$
1,042
   
$
63
 
$
3
 
$
27
   
$
8
   
$
7,080
 
                                                         
Allowance for loan losses:
                                                       
Individually evaluated for impairment
 
$
123
 
$
 
$
   
$
 
$
 
$
9
   
$
   
$
132
 
Collectively evaluated for impairment
   
2,514
   
3,300
   
1,042
     
63
   
3
   
18
     
8
     
6,948
 
   Allowance for loan losses,
    end of period
 
$
2,637
 
$
3,300
 
$
1,042
   
$
63
 
$
3
 
$
27
   
$
8
   
$
7,080
 
                                                         
Loans held for investment:
                                                       
Individually evaluated for impairment
 
$
6,004
 
$
 
$
   
$
745
 
$
 
$
53
   
$
   
$
6,802
 
Collectively evaluated for impairment
   
308,820
   
449,812
   
115,355
     
3,394
   
167
   
430
     
133
     
878,111
 
   Total loans held for investment,
     gross
 
$
314,824
 
$
449,812
 
$
115,355
   
$
4,139
 
$
167
 
$
483
   
$
133
   
$
884,913
 
   Allowance for loan losses as
    a percentage of gross loans
    held for investment 
     0.84    0.73    0.90      1.52    1.80    5.59      6.02      0.79
 
21
   
Quarter Ended March 31, 2018
 
(In Thousands)
 
Single-
family
   
Multi-
family
   
Commercial
Real Estate
   
Construction
   
Commercial Business
   
Consumer
   
Total
 
Allowance for loan losses:
                                         
Allowance at beginning of  period
 
$
3,303
   
$
3,295
   
$
933
   
$
504
   
$
32
   
$
8
   
$
8,075
 
Provision (recovery) for loan losses
   
(143
)
   
17
     
33
     
(410
)
   
(1
)
   
(1
)
   
(505
)
Recoveries
   
71
     
     
     
     
     
     
71
 
Charge-offs
   
(110
)
   
     
     
     
     
     
(110
)
   Allowance for loan losses,
    end of period
 
$
3,121
   
$
3,312
   
$
966
   
$
94
   
$
31
   
$
7
   
$
7,531
 
                                                         
Allowance for loan losses:
                                                       
Individually evaluated for impairment
 
$
161
   
$
   
$
   
$
   
$
15
   
$
   
$
176
 
Collectively evaluated for impairment
   
2,960
     
3,312
     
966
     
94
     
16
     
7
     
7,355
 
   Allowance for loan losses,
    end of period
 
$
3,121
   
$
3,312
   
$
966
   
$
94
   
$
31
   
$
7
   
$
7,531
 
                                                         
Loans held for investment:
                                                       
Individually evaluated for impairment
 
$
7,929
   
$
   
$
   
$
   
$
73
   
$
   
$
8,002
 
Collectively evaluated for impairment
   
308,983
     
466,266
     
106,937
     
5,324
     
377
     
130
     
888,017
 
   Total loans held for investment,
    gross
 
$
316,912
   
$
466,266
   
$
106,937
   
$
5,324
   
$
450
   
$
130
   
$
896,019
 
   Allowance for loan losses as
    a percentage of gross loans
    held for investment
   
0.98
%
   
0.71
%
   
0.90
%
   
1.77
%
   
6.89
%
   
5.38
%
   
0.84
%



22
  Nine Months Ended March 31, 2019  
(In Thousands)
 
Single-
family
   
Multi-
family
   
Commercial
Real Estate
   
Construction
   
Other
   
Commercial Business
   
Consumer
 
Total
 
Allowance for loan losses:
                                             
Allowance at beginning of  period
 
$
2,783
   
$
3,492
   
$
1,030
   
$
47
   
$
3
   
$
24
   
$
6
   
$
7,385
 
Provision (recovery) for loan losses
   
(292
)
   
(192
)
   
12
     
16
     
     
3
     
3
     
(450
)
Recoveries
   
177
     
     
     
     
     
     
2
     
179
 
Charge-offs
   
(31
)
   
     
     
     
     
     
(3
)
   
(34
)
   Allowance for loan losses,
    end of period
 
$
2,637
   
$
3,300
   
$
1,042
   
$
63
   
$
3
   
$
27
   
$
8
   
$
7,080
 
                                                               
Allowance for loan losses:
                                                             
Individually evaluated for impairment
 
$
123
   
$
   
$
   
$
   
$
   
$
9
   
$
   
$
132
 
Collectively evaluated for impairment
   
2,514
     
3,300
     
1,042
     
63
     
3
     
18
     
8
     
6,948
 
   Allowance for loan losses,
    end of period
 
$
2,637
   
$
3,300
   
$
1,042
   
$
63
   
$
3
   
$
27
   
$
8
   
$
7,080
 
                                                               
Loans held for investment:
                                                             
Individually evaluated for impairment
 
$
6,004
   
$
   
$
   
$
745
   
$
   
$
53
   
$
   
$
6,802
 
Collectively evaluated for impairment
   
308,820
     
449,812
     
115,355
     
3,394
     
167
     
430
     
133
     
878,111
 
   Total loans held for investment,
    gross
 
$
314,824
   
$
449,812
   
$
115,355
   
$
4,139
   
$
167
   
$
483
   
$
133
   
$
884,913
 
   Allowance for loan losses as
    a percentage of gross loans
    held for investment
   
0.84
%
   
0.73
%
   
0.90
%
   
1.52
%
   
1.80
%
   
5.59
%
   
6.02
%
   
0.79
%
 

 
 
23
   
Nine Months Ended March 31, 2018
 
(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
   
(319
)
   
(108
)
   
87
     
(2
)
   
(5
)
   
     
(347
Recoveries
   
203
     
     
     
     
     
     
203
 
Charge-offs
   
(364
)
   
     
     
     
     
     
(364
   Allowance for loan losses,
    end of period
 
$
3,121
   
$
3,312
   
$
966
   
$
94
   
$
31
   
$
7
   
$
7,531
 
                                                         
Allowance for loan losses:
                                                       
Individually evaluated for impairment
 
$
161
   
$
   
$
   
$
   
$
15
   
$
   
$
176
 
Collectively evaluated for impairment
   
2,960
     
3,312
     
966
     
94
     
16
     
7
     
7,355
 
   Allowance for loan losses,
    end of period
 
$
3,121
   
$
3,312
   
$
966
   
$
94
   
$
31
   
$
7
   
$
7,531
 
                                                         
Loans held for investment:
                                                       
Individually evaluated for impairment
 
$
7,929
   
$
   
$
   
$
   
$
73
   
$
   
$
8,002
 
Collectively evaluated for impairment
   
308,983
     
466,266
     
106,937
     
5,324
     
377
     
130
     
888,017
 
   Total loans held for investment, gross
 
$
316,912
   
$
466,266
   
$
106,937
   
$
5,324
   
$
450
   
$
130
   
$
896,019
 
Allowance for loan losses as
  a percentage of gross loans
  held for investment
   
0.98
%
   
0.71
%
   
0.90
%
   
1.77
%
   
6.89
     
5.38
%
   
0.84
 
%


24
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 March 31, 2019
 
   
Unpaid
                     
Net
 
   
Principal
   
Related
   
Recorded
         
Recorded
 
(In Thousands)
 
Balance
   
Charge-offs
   
Investment
   
Allowance (1)
   
Investment
 
                               
Mortgage loans:
                             
   Single-family:
                             
      With a related allowance
 
$
1,813
   
$
   
$
1,813
   
$
(284
)
 
$
1,529
 
      Without a related allowance (2)
   
4,336
     
(539
)
   
3,797
     
     
3,797
 
   Total single-family
   
6,149
     
(539
)
   
5,610
     
(284
)
   
5,326
 
                                         
   Construction:
                                       
      Without a related allowance (3)
   
745
     
     
745
     
     
745
 
   Total construction
   
745
     
     
745
     
     
745
 
                                         
Commercial business loans:
                                       
   With a related allowance
   
53
     
     
53
     
(9
)
   
44
 
Total commercial business loans
   
53
     
     
53
     
(9
)
   
44
 
                                         
Total non-performing loans
 
$
6,947
   
$
(539
)
 
$
6,408
   
$
(293
)
 
$
6,115
 

(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.
(3)  There was no related allowance for loan losses because the loans, net of undisbursed loan funds, have been charged-off to their fair value or the fair value of the collateral is higher than the net loan balance.

25
 
   
At June 30, 2018
 
   
Unpaid
                     
Net
 
   
Principal
   
Related
   
Recorded
         
Recorded
 
(In Thousands)
 
Balance
   
Charge-offs
   
Investment
   
Allowance (1)
   
Investment
 
                               
Mortgage loans:
                             
   Single-family:
                               
      With a related allowance
 
$
1,333
   
$
   
$
1,333
   
$
(185
)
 
$
1,148
 
      Without a related allowance (2)
   
5,569
     
(724
)
   
4,845
     
     
4,845
 
   Total single-family
   
6,902
     
(724
)
   
6,178
     
(185
)
   
5,993
 
                                         
Commercial business loans:
                                       
   With a related allowance
   
70
     
     
70
     
(6
)
   
64
 
Total commercial business loans
   
70
     
     
70
     
(6
)
   
64
 
                                         
Total non-performing loans
 
$
6,972
   
$
(724
)
 
$
6,248
   
$
(191
)
 
$
6,057
 

(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 both March 31, 2019 and June 30, 2018, there were no commitments to lend additional funds to those borrowers whose loans were classified as non-performing, except for one construction loan with undisbursed loan funds of $1.2 million at March 31, 2019.

For the quarters ended March 31, 2019 and 2018, the Corporation's average recorded investment in non-performing loans was $6.4 million and $7.6 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 the quarter ended March 31, 2019, the Bank received $63,000 in interest payments from non-performing loans, of which $30,000 were recognized as interest income and the remaining $33,000 were applied to reduce the loan balances under the cost recovery method.  In comparison for the quarter ended March 31, 2018, the Bank received $121,000 in interest payments from non-performing loans, of which $70,000 were recognized as interest income and the remaining $51,000 were applied to reduce the loan balances under the cost recovery method.

For the nine months ended March 31, 2019 and 2018, the Corporation's average recorded investment in non-performing loans was $6.7 million and $8.1 million, respectively.  For the nine months ended March 31, 2019, the Bank received $458,000 in interest payments from non-performing loans, of which $321,000 were recognized as interest income and the remaining $137,000 were applied to reduce the loan balances under the cost recovery method.  In comparison for the nine months ended March 31, 2018, the Bank received $466,000 in interest payments from non-performing loans, of which $240,000 were recognized as interest income and the remaining $226,000 were applied to reduce the loan balances under the cost recovery method.
26
The following tables present the average recorded investment in non-performing loans and the related interest income recognized for the quarters and nine months ended March 31, 2019 and 2018:
   
Quarter Ended March 31,
 
   
2019
   
2018
 
   
Average
   
Interest
   
Average
   
Interest
 
   
Recorded
   
Income
   
Recorded
   
Income
 
(In Thousands)
 
Investment
   
Recognized
   
Investment
   
Recognized
 
                         
Without related allowances:
                       
Mortgage loans:
                       
Single-family
 
$
2,785
   
$
   
$
6,397
   
$
49
 
Construction
   
745
     
     
     
 
     
3,530
     
     
6,397
     
49
 
                                 
With related allowances:
                               
Mortgage loans:
                               
Single-family
   
2,841
     
29
     
1,170
     
20
 
Commercial business loans
   
54
     
1
     
74
     
1
 
     
2,895
     
30
     
1,244
     
21
 
                                 
Total
 
$
6,425
   
$
30
   
$
7,641
   
$
70
 
 

                         
   
Nine Months Ended March 31, 
   
2019
   
2018
 
   
Average
   
Interest
   
Average
   
Interest
 
   
Recorded
   
Income
   
Recorded
   
Income
 
(In Thousands)
 
Investment
   
Recognized
   
Investment
   
Recognized
 
                         
Without related allowances:
                       
Mortgage loans:
                       
Single-family
 
$
3,570
   
$
229
   
$
7,296
   
$
184
 
Commercial real estate
   
     
     
22
     
13
 
Construction
   
579
     
     
     
 
     
4,149
     
229
     
7,318
     
197
 
                                 
With related allowances:
                               
Mortgage loans:
                               
Single-family
   
2,466
     
89
     
738
     
39
 
Commercial business loans
   
61
     
3
     
76
     
4
 
     
2,527
     
92
     
814
     
43
 
                                 
Total
 
$
6,676
   
$
321
   
$
8,132
   
$
240
 

27

For the quarter ended March 31, 2019, no new loans were restructured from their original terms and classified as restructured loans, while one restructured loan from pass category was downgraded to special mention.  For the nine months ended March 31, 2019, no new loans were restructured from their original terms and classified as restructured loans, while one restructured loan was upgraded to the pass category, one restructured loan from the pass category was downgraded to special mention and one restructured loan was paid off.  For the quarters and nine months ended March 31, 2018, there were two loans totaling $2.2 million that were newly modified from their original terms and re-underwritten or identified in the Corporation's asset quality reports as restructured loans. During the quarters and nine months ended March 31, 2019 and 2018, no restructured loans were in default within a 12-month period subsequent to their original restructuring.  Additionally, during the quarter ended March 31, 2019, there was no loan whose modification was extended beyond the initial maturity of the modification; while during the nine months ended March 31, 2019, there was one loan whose modification was extended beyond the initial maturity of the modification. During the quarter and nine months ended March 31, 2018, there were no loans whose modification was extended beyond the initial maturity of the modification.  At both March 31, 2019 and June 30, 2018, there were no commitments to lend additional funds to those borrowers whose loans were restructured.

As of March 31, 2019, the Corporation held 10 restructured loans with a net outstanding balance of $4.6 million: one loan was classified as special mention ($440,000), one loan was classified as substandard and remains on accrual status ($1.4 million) and eight loans were classified as substandard on non-accrual status ($2.7 million). As of June 30, 2018, the Corporation held 11 restructured loans with a net outstanding balance of $5.2 million: one loan was classified as special mention on accrual status ($389,000); one loan was classified as substandard on accrual status ($1.4 million); and nine loans were classified as substandard on non-accrual status ($3.4 million).  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 March 31, 2019 and June 30, 2018, $2.9 million or 63%, and $2.9 million or 56%, 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 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.

28
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)
 
March 31, 2019
   
June 30, 2018
 
Restructured loans on non-accrual status:
           
     Mortgage loans:
           
       Single-family
 
$
2,669
   
$
3,328
 
     Commercial business loans
   
44
     
64
 
       Total
   
2,713
     
3,392
 
                 
Restructured loans on accrual status:
               
     Mortgage loans:
               
       Single-family
   
1,865
     
1,788
 
       Total
   
1,865
     
1,788
 
                 
       Total restructured loans
 
$
4,578
   
$
5,180
 

The following tables identify the Corporation's total recorded investment in restructured loans by type at the dates and for the periods indicated.
   
At March 31, 2019
 
   
Unpaid
                     
Net
 
   
Principal
   
Related
   
Recorded
         
Recorded
 
(In Thousands)
 
Balance
   
Charge-offs
   
Investment
   
Allowance (1)
   
Investment
 
                               
Mortgage loans:
                             
     Single-family:
                             
       With a related allowance
 
$
2,207
   
$
   
$
2,207
   
$
(123
)
 
$
2,084
 
       Without a related allowance (2)
   
2,818
     
(368
)
   
2,450
     
     
2,450
 
     Total single-family
   
5,025
     
(368
)
   
4,657
     
(123
)
   
4,534
 
                                         
Commercial business loans:
                                       
     With a related allowance
   
53
     
     
53
     
(9
)
   
44
 
Total commercial business loans
   
53
     
     
53
     
(9
)
   
44
 
                                         
Total restructured loans
 
$
5,078
   
$
(368
)
 
$
4,710
   
$
(132
)
 
$
4,578
 

(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.

29
   
At June 30, 2018
 
   
Unpaid
                     
Net
 
   
Principal
   
Related
   
Recorded
         
Recorded
 
(In Thousands)
 
Balance
   
Charge-offs
   
Investment
   
Allowance (1)
   
Investment
 
                               
Mortgage loans:
                             
     Single-family
                             
       With a related allowance
 
$
2,228
   
$
   
$
2,228
   
$
(151
)
 
$
2,077
 
       Without a related allowance (2)
   
3,450
     
(411
)
   
3,039
     
     
3,039
 
     Total single-family
   
5,678
     
(411
)
   
5,267
     
(151
)
   
5,116
 
                                         
Commercial business loans:
                                       
     With a related allowance
   
70
     
     
70
     
(6
)
   
64
 
Total commercial business loans
   
70
     
     
70
     
(6
)
   
64
 
                                         
Total restructured loans
 
$
5,748
   
$
(411
)
 
$
5,337
   
$
(157
)
 
$
5,180
 

(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 March 31, 2019, no properties were acquired in the settlement of loans and no previously foreclosed upon properties were sold.  This compares to the quarter ended March 31, 2018 when two properties were acquired in the settlement of loans, and one previously foreclosed upon property was sold. For the nine months ended March 31, 2019, no properties were acquired in the settlement of loans, while two previously foreclosed upon properties were sold. This compares to the nine months ended March 31, 2018 when three properties were acquired in the settlement of loans, and three previously foreclosed upon properties were sold. As of March 31, 2019, there was no outstanding real estate owned property. This compares to two real estate owned properties located in California with a total net fair value of $906,000 at June 30, 2018.  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 March 31, 2019 and June 30, 2018, the Corporation had commitments to extend credit (on loans to be held for investment and loans to be held for sale) of $16.6 million and $66.3 million, respectively.

30

The following table provides information at the dates indicated regarding undisbursed funds on construction loans, 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
 
March 31, 2019
   
June 30, 2018
 
(In Thousands)
           
             
Undisbursed loan funds – Construction loans
 
$
6,109
   
$
4,302
 
Undisbursed lines of credit – Commercial business loans
   
950
     
495
 
Undisbursed lines of credit – Consumer loans
   
481
     
503
 
Commitments to extend credit on loans to be held for investment
   
4,346
     
9,352
 
Total
 
$
11,886
   
$
14,652
 

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 and nine months ended March 31, 2019 and 2018.
   
For the Quarters Ended
March 31,
   
For the Nine Months Ended
March 31,
 
(In Thousands)
 
2019
   
2018
   
2019
   
2018
 
Balance, beginning of the period
 
$
150
   
$
188
   
$
157
   
$
277
 
Provision (recovery)
   
1
     
(29
)
   
(6
)
   
(118
)
Balance, end of the period
 
$
151
   
$
159
   
$
151
   
$
159
 

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 March 31, 2019, $240,000 was included in other assets and $224,000 was included in other liabilities; at June 30, 2018, $849,000 was included in other assets and $464,000 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 recorded within the gain on sale of loans contained in the Condensed Consolidated Statements of Operations during the quarters and nine months ended March 31, 2019 and 2018 was as follows:
   
For the Quarters Ended
March 31,
   
For the Nine Months Ended
March 31,
 
Derivative Financial Instruments
 
2019
   
2018
   
2019
   
2018
 
(In Thousands)
                       
Commitments to extend credit on loans to be held for sale
 
$
(264
)
 
$
266
   
$
(585
)
 
$
173
 
Mandatory loan sale commitments and TBA MBS trades
   
465
     
(281
)
   
216
     
(1,072
)
Option contracts, net
   
     
     
     
(37
)
Total net gain (loss)
 
$
201
   
$
(15
)
 
$
(369
)
 
$
(936
)

31

The outstanding derivative financial instruments and other loan sale agreements at the dates indicated were as follows:
   
March 31, 2019
   
June 30, 2018
 
Derivative Financial Instruments
 
Amount
   
Fair
Value
   
Amount
   
Fair
Value
 
(In Thousands)
                       
Commitments to extend credit on loans to be held for sale (1)
 
$
12,211
   
$
240
   
$
56,906
   
$
825
 
Best efforts loan sale commitments
   
(10,212
)
   
     
(29,502
)
   
 
Mandatory loan sale commitments and TBA MBS trades
   
(28,817
)
   
(224
)
   
(117,759
)
   
(440
)
Total
 
$
(26,818
)
 
$
16
   
$
(90,355
)
 
$
385
 

(1)
Net of 18.6% at March 31, 2019 and 24.7% at June 30, 2018 of commitments which management has estimated may not fund.

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 third quarter of fiscal 2019, the Corporation repurchased two loans totaling $446,000 pursuant to the recourse/repurchase covenants contained in the loan sale agreements. In comparison, the Corporation repurchased two loans totaling $602,000 from investors during the third quarter of fiscal 2018. During the first nine months of fiscal 2019, the Corporation repurchased five loans totaling $699,000, including two loans that were fully charged off ($25,000). In comparison, the Corporation repurchased two loans totaling $602,000 from investors during the first nine months of fiscal 2018. 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 third quarters of fiscal 2019 and 2018, the Corporation did not record any provision for the recourse liability and did not settle any claims.  For the first nine months of fiscal 2019 and 2018, the Corporation recorded a $33,000 recovery and a $22,000 recovery from the recourse liability, respectively, and did not settle any claims.  As of March 31, 2019, the total recourse reserve for loans sold that are subject to repurchase decreased to $250,000, as compared to $283,000 at June 30, 2018 and $283,000 at March 31, 2018.

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 and nine months ended March 31, 2019 and 2018:
   
For the Quarters Ended
March 31,
   
For the Nine Months Ended
March 31,
 
Recourse Liability
 
2019
   
2018
   
2019
   
2018
 
(In Thousands)
                       
                         
Balance, beginning of the period
 
$
250
   
$
283
   
$
283
   
$
305
 
Recovery from recourse liability
   
     
     
(33
)
   
(22
)
Net settlements in lieu of loan repurchases
   
     
     
     
 
Balance, end of the period
 
$
250
   
$
283
   
$
250
   
$
283
 

32

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
Gain (Loss)
 
As of March 31, 2019:
                 
Loans held for investment, at fair value
 
$
5,239
   
$
5,417
   
$
(178
)
Loans held for sale, at fair value
 
$
30,500
   
$
29,565
   
$
935
 
                         
As of June 30, 2018:
                       
Loans held for investment, at fair value
 
$
5,234
   
$
5,546
   
$
(312
)
Loans held for sale, at fair value
 
$
96,298
   
$
93,791
   
$
2,507
 

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
 
33
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, U.S. government sponsored enterprise MBS and privately issued CMO.  The Corporation utilizes quoted prices in active markets for similar securities for its fair value measurement of MBS (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 management estimates of the specific credit risk attributes of each loan, in addition to the quoted secondary-market prices which account for the interest rate characteristics 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 the MSA is derived using the present value method; which includes a third party's prepayment projections of similar instruments, weighted-average coupon rates, estimated servicing costs and discount interest rates (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).

34
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 March 31, 2019 Using:
 
(In Thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
     Investment securities - available for sale:
                       
         U.S. government agency MBS
 
$
   
$
3,796
   
$
   
$
3,796
 
         U.S. government sponsored enterprise MBS
   
     
2,198
     
     
2,198
 
         Private issue CMO
   
     
     
300
     
300
 
             Investment securities - available for sale
   
     
5,994
     
300
     
6,294
 
                                 
     Loans held for investment, at fair value
   
     
     
5,239
     
5,239
 
     Loans held for sale, at fair value
   
     
30,500
     
     
30,500
 
     Interest-only strips
   
     
     
18
     
18
 
                                 
     Derivative assets:
                               
         Commitments to extend credit on loans to be held for sale
   
     
     
240
     
240
 
             Derivative assets
   
     
     
240
     
240
 
Total assets
 
$
   
$
36,494
   
$
5,797
   
$
42,291
 
                                 
Liabilities:
                               
         Derivative liabilities:
                               
         Mandatory loan sale commitments
 
$
   
$
   
$
7
   
$
7
 
         TBA MBS trades
   
     
217
     
     
217
 
             Derivative liabilities
   
     
217
     
7
     
224
 
Total liabilities
 
$
   
$
217
   
$
7
   
$
224
 

35
   
Fair Value Measurement at June 30, 2018 Using:
 
(In Thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
     Investment securities - available for sale:
                       
         U.S. government agency MBS
 
$
   
$
4,384
   
$
   
$
4,384
 
         U.S. government sponsored enterprise MBS
   
     
2,762
     
     
2,762
 
         Private issue CMO
   
     
     
350
     
350
 
             Investment securities - available for sale
   
     
7,146
     
350
     
7,496
 
                                 
     Loans held for investment, at fair value
   
     
     
5,234
     
5,234
 
     Loans held for sale, at fair value
   
     
96,298
     
     
96,298
 
     Interest-only strips
   
     
     
23
     
23
 
                                 
     Derivative assets:
                               
         Commitments to extend credit on loans to be held for sale
   
     
     
849
     
849
 
             Derivative assets
   
     
     
849
     
849
 
Total assets
 
$
   
$
103,444
   
$
6,456
   
$
109,900
 
                                 
Liabilities:
                               
     Derivative liabilities:
                               
         Commitments to extend credit on loans to be held for sale
 
$
   
$
   
$
24
   
$
24
 
         Mandatory loan sale commitments
   
     
     
32
     
32
 
         TBA MBS trades
   
     
408
     
     
408
 
             Derivative liabilities
   
     
408
     
56
     
464
 
Total liabilities
 
$
   
$
408
   
$
56
   
$
464
 

 

 

36
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 March 31, 2019
 
   
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
Commitments
to Originate (2)
   
Mandatory
Commitments (3)
 
Total
 
Beginning balance at December 31, 2018
 
$
310
   
$
4,995
   
$
21
   
$
504
   
$
(9
)
 
$
5,821
 
     Total gains or losses (realized/unrealized):
                                               
        Included in earnings
   
     
87
     
     
(264
)
   
(3
)
   
(180
)
        Included in other comprehensive loss
   
1
     
     
(3
)
   
     
     
(2
)
     Purchases
   
     
     
     
     
     
 
     Issuances
   
     
     
     
     
     
 
     Settlements
   
(11
)
   
(34
)
   
     
     
5
     
(40
)
     Transfers in and/or out of Level 3
   
     
191
     
     
     
     
191
 
Ending balance at March 31, 2019
 
$
300
   
$
5,239
   
$
18
   
$
240
   
$
(7
)
 
$
5,790
 

(1)
The valuation of loans held for investment at fair value includes the management estimates of the specific credit risk attributes of each loan, in addition to the quoted secondary-market prices which account for the interest rate characteristics of each loan.
(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 March 31, 2018
 
   
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)
   
Total
 
Beginning balance at December 31, 2017
 
$
419
   
$
5,157
   
$
26
   
$
716
   
$
(24
)
 
$
6,294
 
     Total gains or losses (realized/unrealized):
                                               
         Included in earnings
   
     
(118
)
   
     
266
     
(26
)
   
122
 
         Included in other comprehensive loss
   
(2
)
   
     
(2
)
   
     
     
(4
)
     Purchases
   
     
     
     
     
     
 
     Issuances
   
     
     
     
     
     
 
     Settlements
   
(22
)
   
(43
)
   
     
     
     
(65
)
     Transfers in and/or out of Level 3
   
     
     
     
     
     
 
Ending balance at March 31, 2018
 
$
395
   
$
4,996
   
$
24
   
$
982
   
$
(50
)
 
$
6,347
 

(1)
The valuation of loans held for investment at fair value includes the management estimates of the specific credit risk attributes of each loan, in addition to the quoted secondary-market prices which account for the interest rate characteristics of each loan.
(2)
Consists of commitments to extend credit on loans to be held for sale.
(3)
Consists of mandatory loan sale commitments.
 
37
 
   
For the Nine Months Ended March 31, 2019
 
   
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
Commitments
to Originate (2)
   
Mandatory
Commitments (3)
 
Total
 
Beginning balance at June 30, 2018
 
$
350
   
$
5,234
   
$
23
   
$
825
   
$
(32
)
 
$
6,400
 
     Total gains or losses (realized/unrealized):
                                               
         Included in earnings
   
     
133
     
     
(585
)
   
18
     
(434
)
         Included in other comprehensive loss
   
     
     
(5
)
   
     
     
(5
)
     Purchases
   
     
     
     
     
     
 
     Issuances
   
     
     
     
     
     
 
     Settlements
   
(50
)
   
(789
)
   
     
     
7
     
(832
)
     Transfers in and/or out of Level 3
   
     
661
     
     
     
     
661
 
Ending balance at March 31, 2019
 
$
300
   
$
5,239
   
$
18
   
$
240
   
$
(7
)
 
$
5,790
 

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

 
   
For the Nine Months Ended March 31, 2018
 
   
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
   
     
(72
)
   
     
173
     
(99
)
   
(37
)
   
(35
)
         Included in other comprehensive loss
   
(1
)
   
     
(7
)
   
     
     
     
(8
)
     Purchases
   
     
     
     
     
     
     
 
     Issuances
   
     
     
     
     
     
     
 
     Settlements
   
(65
)
   
(1,899
)
   
     
     
2
     
     
(1,962
)
     Transfers in and/or out of Level 3
   
     
522
     
     
     
     
     
522
 
Ending balance at March 31, 2018
 
$
395
   
$
4,996
   
$
24
   
$
982
   
$
(50
)
 
$
   
$
6,347
 

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


38
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 March 31, 2019 Using:
 
(In Thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Non-performing loans
 
$
   
$
4,541
   
$
1,574
   
$
6,115
 
Mortgage servicing assets
   
     
     
456
     
456
 
Real estate owned, net
   
     
     
     
 
Total
 
$
   
$
4,541
   
$
2,030
   
$
6,571
 

   
Fair Value Measurement at June 30, 2018 Using:
 
(In Thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Non-performing loans
 
$
   
$
4,845
   
$
1,212
   
$
6,057
 
Mortgage servicing assets
   
     
     
135
     
135
 
Real estate owned, net
   
     
906
     
     
906
 
Total
 
$
   
$
5,751
   
$
1,347
   
$
7,098
 
 
 

 
39
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 March 31, 2019:
(Dollars In Thousands)
 
Fair Value
As of
March 31,
2019
 
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
 
$
300
 
Market comparable
  pricing
Comparability adjustment
 
1.2% – 1.3% (1.2%)
 
Increase
                          
Loans held for investment,
    at fair value
 
$
5,239
 
Relative value
  analysis
Broker quotes

Credit risk factors
 
98.3% – 105.2%
(101.1%) of par
1.2% - 100.0% (4.3%)
 
Increase

Decrease
                          
Non-performing loans
 
$
703
 
Discounted cash flow
Default rates
 
5.0%
 
Decrease
Non-performing loans
 
$
871
 
Relative value
  analysis
Loss severity
 
20.0% - 30.0% (21.3%)
 
Decrease
                          
Mortgage servicing assets
 
$
456
 
Discounted cash flow
Prepayment speed (CPR)
Discount rate
 
9.7% - 60.0% (21.7%)
9.0% - 10.5%(9.2%)
 
Decrease
Decrease
                          
Interest-only strips
 
$
18
 
Discounted cash flow
Prepayment speed (CPR)
Discount rate
 
18.7% - 35.9% (34.3%)
9.0%
 
Decrease
Decrease
                          
Commitments to extend credit
    on loans to be held for sale
 
$
240
 
Relative value
  analysis
TBA-MBS broker quotes
Fall-out ratio (3)
 
99.0% – 103.4%
(101.6%) of par
18.5% - 19.1% (18.6%)
 
Increase
 
Decrease
                          
Liabilities:
                       
                          
Mandatory loan sale
   commitments
 
$
7
 
Relative value
  analysis
TBA MBS broker quotes
 
Roll-forward costs (4)
 
102.3% - 105.7%
(103.9%) of par
0.015%
 
Increase
 
Increase
(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, estimated 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.

40
The carrying amount and fair value of the Corporation's other financial instruments as of March 31, 2019 and June 30, 2018 was as follows:
   
March 31, 2019
 
(In Thousands)
 
Carrying
Amount
   
Fair
Value
   

Level 1
   

Level 2
   

Level 3
 
Financial assets:
                             
   Investment securities - held to maturity
 
$
102,510
   
$
103,056
     
   
$
103,056
   
$
 
   Loans held for investment, not recorded at fair value
 
$
878,315
   
$
857,399
     
     
   
$
857,399
 
   FHLB – San Francisco stock
 
$
8,199
   
$
8,199
     
   
$
8,199
     
 
                                         
Financial liabilities:
                                       
   Deposits
 
$
876,884
   
$
847,875
     
     
   
$
847,875
 
   Borrowings
 
$
101,121
   
$
101,274
     
     
   
$
101,274
 

   
June 30, 2018
 
(In Thousands)
 
Carrying
Amount
   
Fair
Value
   

Level 1
   

Level 2
   

Level 3
 
Financial assets:
                             
   Investment securities - held to maturity
 
$
87,813
   
$
87,239
     
   
$
87,239
     
 
   Loans held for investment, not recorded at fair value
 
$
897,451
   
$
873,112
     
     
   
$
873,112
 
   FHLB – San Francisco stock
 
$
8,199
   
$
8,199
     
   
$
8,199
     
 
                                         
Financial liabilities:
                                       
   Deposits
 
$
907,598
   
$
877,641
     
     
   
$
877,641
 
   Borrowings
 
$
126,163
   
$
123,778
     
     
   
$
123,778
 

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

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.

41
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.

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 March 31, 2019, 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 March 31, 2019, 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 March 31, 2019 and 2018, the compensation cost for these plans was $37,000 and $292,000, respectively.  The income tax benefit (deficiencies) recognized in the Condensed Consolidated Statements of Operations per adoption of ASU 2016-09 for share-based compensation plans for the quarters ended March 31, 2019 and 2018 was $(10,000) and $186,000, respectively.

For the first nine months ended March 31, 2019 and 2018, the compensation cost for these plans was $767,000 and $816,000, 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 nine months ended March 31, 2019 and 2018 was $114,000 and $206,000, respectively.

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
 
42
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 third quarter of fiscal 2019, no options were granted or forfeited, and 11,250 options were exercised.  This compares to the third quarter of fiscal 2018 when no options were granted or forfeited, and 56,500 options were exercised. During the first nine months of fiscal 2019, no options were granted or forfeited, and 31,250 options were exercised. This compares to the first nine months of fiscal 2018 when no options were granted, and 83,750 options were exercised and 2,500 options were forfeited.  As of March 31, 2019 and 2018, there were 147,500 stock options available for future grants under the Plans at both dates.

The following tables summarize the stock option activity in the Plans for the quarter and nine months ended March 31, 2019.

   
For the Quarter Ended March 31, 2019
 
Options
 
Shares
   
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
($000)
 
Outstanding at December 31, 2018
   
509,000
   
$
12.83
         
Granted
   
   
$
         
Exercised
   
(11,250
)
 
$
14.59
         
Forfeited
   
   
$
         
Outstanding at March 31, 2019
   
497,750
   
$
12.79
     
4.53
   
$
3,551
 
Vested and expected to vest at March 31, 2019
   
495,150
   
$
12.75
     
4.52
   
$
3,550
 
Exercisable at March 31, 2019
   
484,750
   
$
12.60
     
4.45
   
$
3,546
 


   
For the Nine Months Ended March 31, 2019
 
Options
 
Shares
   
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
($000)
 
Outstanding at June 30, 2018
   
529,000
   
$
12.77
         
Granted
   
   
$
         
Exercised
   
(31,250
)
 
$
12.49
         
Forfeited
   
   
$
         
Outstanding at March 31, 2019
   
497,750
   
$
12.79
     
4.53
   
$
3,551
 
Vested and expected to vest at March 31, 2019
   
495,150
   
$
12.75
     
4.52
   
$
3,550
 
Exercisable at March 31, 2019
   
484,750
   
$
12.60
     
4.45
   
$
3,546
 

 
As of March 31, 2019 and 2018, there was $68,000 and $503,000 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 1.5 years and 1.0 years, respectively.  The forfeiture rate during the first nine months of fiscal 2019 and 2018 was 20 percent for both periods, and was calculated by using the historical forfeiture experience of stock option grants and is reviewed annually.

43
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 were no restricted stock awards and no forfeitures, while there were 3,000 shares of restricted stock vested in the third quarter of fiscal 2019. This compares to no restricted stock activity in the third quarter of fiscal 2018, other than the vesting of 10,500 shares. For the first nine months of fiscal 2019, there was no restricted stock activity, other than the vesting of 89,500 shares. This compares to no restricted stock activity, other than the vesting of 10,500 shares and the forfeiture of 2,000 shares for the first nine months of fiscal 2018.  As of March 31, 2019 and 2018, there were 267,750 shares of restricted stock available for future awards under the Plans at both dates.

The following tables summarize the unvested restricted stock activity for the quarter and nine months ended March 31, 2019.

   
For the Quarter Ended
March 31, 2019
 
Unvested Shares
 
Shares
   
Weighted-
Average
Award Date
Fair Value
 
Unvested at December 31, 2018
   
12,000
   
$
18.31
 
Granted
   
   
$
 
Vested
   
(3,000
)
 
$
18.90
 
Forfeited
   
   
$
 
Unvested at March 31, 2019
   
9,000
   
$
18.11
 
Expected to vest at March 31, 2019
   
7,200
   
$
18.11
 

   
For the Nine Months Ended
March 31, 2019
 
Unvested Shares
 
Shares
   
Weighted-
Average
Award Date
Fair Value
 
Unvested at June 30, 2018
   
98,500
   
$
14.35
 
Granted
   
   
$
 
Vested
   
(89,500
)
 
$
13.97
 
Forfeited
   
   
$
 
Unvested at March 31, 2019
   
9,000
   
$
18.11
 
Expected to vest at March 31, 2019
   
7,200
   
$
18.11
 

As of March 31, 2019 and 2018, the unrecognized compensation expense was $131,000 and $687,000, 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 1.2 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 nine months of fiscal 2019 and 2018.

44

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

The following tables provide the changes in AOCI by component for the quarters and nine months ended March 31, 2019 and 2018.
   
For the Quarter Ended March 31, 2019
 
   
Unrealized gains and losses on
 
(In Thousands)
 
Investment securities
available for sale
 
Interest-
only strips
   
Total
 
                   
Beginning balance at December 31, 2018
 
$
154
   
$
15
   
$
169
 
                         
Other comprehensive loss before reclassifications
   
(4
)
   
(2
)
   
(6
)
Amount reclassified from accumulated other comprehensive income
   
     
     
 
Net other comprehensive loss
   
(4
)
   
(2
)
   
(6
)
                         
Ending balance at March 31, 2019
 
$
150
   
$
13
   
$
163
 
 
   
For the Quarter Ended March 31, 2018
 
   
Unrealized gains and losses on
 
(In Thousands)
 
Investment securities
available for sale
 
Interest-
only strips
   
Total
 
                   
Beginning balance at December 31, 2017
 
$
195
   
$
15
   
$
210
 
                         
Other comprehensive loss before reclassifications
   
(20
)
   
(2
)
   
(22
)
Amount reclassified from accumulated other comprehensive income
   
(2
)
   
     
(2
)
Net other comprehensive loss
   
(22
)
   
(2
)
   
(24
)
                         
Ending balance at March 31, 2018
 
$
173
   
$
13
   
$
186
 
       
       
   
For the Nine Months Ended March 31, 2019
 
   
Unrealized gains and losses on
 
(In Thousands)
 
Investment securities
available for sale
 
Interest-
only strips
   
Total
 
                         
Beginning balance at June 30, 2018
 
$
194
   
$
16
   
$
210
 
                         
Other comprehensive loss before reclassifications
   
(44
)
   
(3
)
   
(47
)
Amount reclassified from accumulated other comprehensive income
   
     
     
 
Net other comprehensive loss
   
(44
)
   
(3
)
   
(47
)
                         
Ending balance at March 31, 2019
 
$
150
   
$
13
   
$
163
 

45
   
For the Nine Months Ended March 31, 2018
 
   
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 loss before reclassifications
   
(78
)
   
(8
)
   
(86
)
Amount reclassified from accumulated other comprehensive income
   
40
     
3
     
43
 
Net other comprehensive loss
   
(38
)
   
(5
)
   
(43
)
                         
Ending balance at March 31, 2018
 
$
173
   
$
13
   
$
186
 
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 March 31, 2019:
    
Gross
Net
       
    
Amount
Amount
       
    
Offset in the
of Assets in
Gross Amount Not Offset in
 
    
Condensed
the Condensed
the Condensed Consolidated
 
 
Gross
Consolidated
Consolidated
Statements of Financial Condition
 
 
Amount of
Statements
Statements
 
 Cash
 
 
Recognized
of Financial
of Financial
Financial
Collateral
Net
(In Thousands)
Assets
Condition
Condition
Instruments
Received
Amount
Assets
                
   Derivatives
 
$—
 
$—
 
$—
 
$—
 
$—
 
$—
Total
 
$—
 
$—
 
$—
 
$—
 
$—
 
$—
 
46

 
    
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
 
$224
 
$—
 
$224
 
$—
 
$—
 
$224
Total
 
$224
 
$—
 
$224
 
$—
 
$—
 
$224

As of June 30, 2018:
    
Gross
Net
       
    
Amount
Amount
       
    
Offset in the
of Assets in
Gross Amount Not Offset in
 
    
Condensed
the Condensed
the Condensed Consolidated
 
 
Gross
Consolidated
Consolidated
Statements of Financial Condition
 
 
Amount of
Statements
Statements
 
 Cash
 
 
Recognized
of Financial
of Financial
Financial
Collateral
Net
(In Thousands)
Assets
Condition
Condition
Instruments
Received
Amount
Assets
                
   Derivatives
 
$—
 
$—
 
$—
 
$—
 
$—
 
$—
Total
 
$—
 
$—
 
$—
 
$—
 
$—
 
$—

    
Gross
Net
       
    
Amount
Amount
       
    
Offset in the
of Liabilities in
Gross Amount Not Offset in
 
    
Condensed
the Condensed
the Condensed Consolidated
 
 
Gross
Consolidated
Consolidated
Statements of Financial Condition
 
 
Amount of
Statements
Statements
 
 Cash
 
 
Recognized
of Financial
of Financial
Financial
Collateral
Net
(In Thousands)
Liabilities
Condition
Condition
Instruments
Received
Amount
Liabilities
                
   Derivatives
 
$440
 
$—
 
$440
 
$—
 
$—
 
$440
Total
 
$440
 
$—
 
$440
 
$—
 
$—
 
$440


Note 12: Revenue From Contracts With Customers

In accordance with ASC 606, revenues are recognized when goods or services are transferred to the customer in exchange for the consideration the Company expects to be entitled to receive. The largest portion of the Company's revenue is from interest income, which is not in the scope of ASC 606. All of the Company's revenue from contracts with customers in the scope of ASC 606 is recognized in non-interest income.

47
If a contract is determined to be within the scope of ASC 606, the Company recognizes revenue as it satisfies a performance obligation. Payments from customers are generally collected at the time services are rendered, monthly, or quarterly. For contracts with customers within the scope of ASC 606, revenue is either earned at a point in time or revenue is earned over time. Examples of revenue earned at a point in time are automated teller machine ("ATM") transaction fees, wire transfer fees, overdraft fees and interchange fees. Revenue is primarily based on the number and type of transactions that are generally derived from transactional information accumulated by our systems and is recognized immediately as the transactions occur or upon providing the service to complete the customer's transaction. The Company is generally the principal in these contracts, with the exception of interchanges fees, in which case the Company is acting as the agent and records revenue net of expenses paid to the principal. Examples of revenue earned over time, which generally occur on a monthly basis, are deposit account maintenance fees, investment advisory fees, merchant revenue, trust and investment management fees and safe deposit box fees. Revenue is generally derived from transactional information accumulated by our systems or those of third-parties and is recognized as the related transactions occur or services are rendered to the customer.

Disaggregation of Revenue:

The following table includes the Company's non-interest income disaggregated by type of services for the quarters and nine months ended March 31, 2019 and 2018:
 
   
For the Quarters Ended
March 31,
   
For the Nine Months Ended
March 31,
 
Type of Services
 
2019
   
2018
   
2019
   
2018
 
(In Thousands)
                       
Asset management fees
 
$
77
   
$
87
   
$
215
   
$
294
 
Debit card and ATM fees
   
395
     
394
     
1,227
     
1,190
 
Deposit related fees
   
484
     
549
     
1,522
     
1,659
 
Loan related fees
   
12
     
(6
)
   
25
     
(42
)
BOLI (1)
   
47
     
65
     
140
     
199
 
Loan servicing fees (1)
   
262
     
493
     
863
     
1,173
 
Net gain on sale of loans (1)
   
1,719
     
3,597
     
7,114
     
12,761
 
Other
   
56
     
31
     
90
     
69
 
Total non-interest income
 
$
3,052
   
$
5,210
   
$
11,196
   
$
17,303
 

(1)
Not in scope of ASC 606.

For the quarters and nine months ended March 31, 2019 and 2018, substantially all of the Company's revenues within the scope of ASC 606 are for performance obligations satisfied at a specified date.

Revenues recognized in scope of ASC 606:

Asset management fees: Asset management fees are variable, since they are based on the underlying portfolio value, which is subject to market conditions and amounts invested by clients through a third-party provider. Asset management fees are recognized over the period that services are provided, and when the portfolio values are known or can be estimated at the end of each month.

Debit card and ATM fees: Debit and ATM interchange income represents fees earned when a debit card issued by the Bank is used. The Bank earns interchange fees from debit cardholder transactions through a third party payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders' debit card. Certain expenses directly associated with the debit cards are recorded on a net basis with the interchange income.
 
48

Deposit related fees: Fees are earned on the Bank's deposit accounts for various products offered to or services performed for the Bank's customers. Fees include business account fees, non-sufficient fund fees, stop payment fees, wire services, safe deposit box and others. These fees are recognized on a daily, monthly or quarterly basis, depending on the type of service.

Loan related fees: Non-interest loan fee income is earned on loans that the Bank services, excluding loan servicing fees which are not within the scope of ASC 606. Loan related fees include prepayment fees, late charges, brokered loan fees, maintenance fees and others. These fees are recognized on a daily, monthly, quarterly or annual basis, depending on the type of service.

Other: Fees earned on other services, such as merchant services or occasional non-recurring type services, are recognized at the time of the event or the applicable billing cycle.


Note 13: Income Taxes

On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Tax Act reduces the corporate federal tax income rate from a maximum of 35 percent to a flat 21 percent. The federal corporate tax rate reduction was effective January 1, 2018. Since the Corporation has a fiscal year end of June 30th, the reduced federal corporate income tax rate for its fiscal year 2018 resulted in the application of a blended federal statutory income tax rate of 28.06 percent, which is based on the applicable tax rates before and after the Tax Act and corresponding number of days in the fiscal year before and after enactment, and then a flat 21 percent tax rate thereafter.

Under generally accepted accounting principles, the Corporation uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. At June 30, 2017, the Corporation's deferred tax assets and liabilities were determined based on the then-current enacted federal tax rate of 35 percent. As a result of the reduction in the federal corporate income tax rate under the Tax Act, the Corporation revalued its deferred tax assets and liabilities at December 31, 2017. Deferred tax assets and liabilities realized in fiscal year 2018 were re-measured using the aforementioned blended rate. All remaining deferred tax assets and liabilities were re-measured using the new statutory federal rate of 21 percent. These re-measurements collectively resulted in a discrete tax expense of $1.9 million that was recognized in the first nine months of fiscal 2018.

The estimated combined federal and state statutory tax rates, before discrete items, for fiscal years 2019 and 2018 are as follows:
Statutory Tax Rates
   
FY2019
FY2018
Federal Tax Rate
   
21.00%
28.06%
State Tax Rate
   
10.84%
10.84%
Combined Statutory Tax Rate (1)
   
29.56%
35.86%

(1) The combined statutory tax rate is net of the federal tax benefit for the state tax deduction.

The Corporation's effective tax rate may differ from the estimated statutory tax rates described above due to discrete items such as further adjustments to net deferred tax assets, excess tax benefits derived from stock option exercises and non-taxable earnings from bank owned life insurance, among other items.

49

Note 14: Subsequent Event

On April 30, 2019, 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 May 21, 2019 will be entitled to receive the cash dividend.  The cash dividend will be payable on June 11, 2019.

On April 30, 2019, the Corporation announced that the Corporation's Board of Directors authorized a one-year extension of the April 2018 stock repurchase plan.  To date, a total of 23,748 shares of the Corporation's common stock have been purchased under the plan, leaving 349,252 shares of the Corporation's common stock authorized for purchase from time to time in the open market or in privately negotiated transactions prior to the expiration of the extension on April 26, 2020.


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 March 31, 2019, the Corporation had total assets of $1.12 billion, total deposits of $876.9 million and total stockholders' equity of $121.2 million.  The Corporation has not engaged in any significant activity other than holding the stock of the Bank.  Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank and its subsidiaries.  As used in this report, the terms "we," "our," "us," and "Corporation" refer to Provident Financial Holdings, Inc. and its consolidated subsidiaries, unless the context indicates otherwise.

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

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 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).  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.

On February 4, 2019, the Corporation announced that the Corporation's Board of Directors determined that it was in the long-term best interests of the Corporation to exit the operations of the Corporation's mortgage banking segment conducted through PBM.

50
The Corporation began to distribute quarterly cash dividends in the quarter ended March 31, 2002.  On January 29, 2019, 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 February 19, 2019, which was paid on March 12, 2019.  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.

On April 30, 2019, 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 May 21, 2019 will be entitled to receive the cash dividend.  The cash dividend will be payable on June 11, 2019.

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, liquidity, results of operations, plans, objectives, future performance or business. You should not place undue reliance on these statements, as they are subject to risks and uncertainties.  When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements the Corporation may make.  Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Corporation. 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 following: the possibility that the actual costs incurred from our exiting the mortgage banking business and the possibility that the actual changes in pre-tax losses from the mortgage banking segment and our pre-tax income will be materially different from the estimated changes provided in this report; the possibility that our mortgage banking business may experience increased volatility in its revenues and earnings before the discontinuation of the mortgage banking business, 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 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; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; 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
 
51
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.  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 2018 Annual Report on Form 10-K for the year ended June 30, 2018 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 nine months ended March 31, 2019 to the critical accounting policies as described in the Corporation's 2018 Annual Report on Form 10-K for the period ended June 30, 2018.


52

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.

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 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 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. On February 4, 2019, the Corporation announced that it was in the long-term best interests of the Corporation to discontinue the operations of the Corporation's mortgage banking segment conducted through PBM.

This decision was reached after an analysis of current economic conditions and the current operating environment for the highly competitive mortgage banking business, including the significant decline in loan origination volume.  The Corporation had been pursuing a strategy of improving the profitability of its mortgage banking business by significantly reducing operating expenses commensurate with the significant decline in loan origination volume while maintaining loan sale margins and prudent underwriting standards.  However, based on the operating environment and market conditions for the foreseeable future, the Corporation determined that it would be unable to successfully execute that strategy within a reasonable period of time.

The Corporation plans to continue to originate single-family mortgage loans for retention on its balance sheet, primarily within its market area, the Inland Empire region of Southern California and purchase these loans consistent with its historical activity in this regard.  Upon termination of PBM's mortgage banking operations, PBM will no longer be reported as a segment of the Corporation.  The Corporation currently estimates that PBM's mortgage banking operations will end on or before June 30, 2019 and expects that the headcount in the Corporation will decrease by approximately 122 full time equivalent employees by that date.

As a result of exiting the mortgage banking business, the Corporation estimates:
quarterly net interest income from the mortgage banking segment to decline approximately $306,000 (net of funding costs) by the first quarter of fiscal 2020 from $306,000 in the second quarter of fiscal 2019 due to the decrease in loans held for sale,
 
53
quarterly non-interest income from the mortgage banking segment to decline approximately $2.7 million by the first quarter of fiscal 2020 from $2.7 million in the second quarter of fiscal 2019,
quarterly non-interest expense from the mortgage banking segment to decrease approximately $4.6 million by the first quarter of fiscal 2020 from $4.6 million in the second quarter of fiscal 2019,
quarterly non-interest income from the community banking segment to increase approximately $272,000 to $1.2 million by the end of the first quarter of fiscal 2020 from $906,000 in the second quarter of fiscal 2019 as a result of the discontinuation of inter-company charges to compensate PBM for originating loans held for investment and for servicing fees on loans sold on a servicing retained basis,
quarterly non-interest expense from the community banking segment to increase approximately $649,000 to $6.9 million by the end of the first quarter of fiscal 2020 from $6.3 million in the second quarter of fiscal 2019 as a result of retaining certain mortgage banking personnel to continue to originate and purchase single-family mortgage loans for retention on the Bank's balance sheet and discontinuation of the management fee allocation from the Bank to the mortgage banking segment,
the estimated fully phased in quarterly impact of these changes in fiscal 2020 will be to increase the pre-tax income by approximately $1.2 million per quarter in comparison to the second quarter of fiscal 2019,
the Corporation will stop accepting loan applications and loan locks from the mortgage banking segment early in the fourth quarter of fiscal 2019, as a result, revenues will decrease more quickly than expenses but the declines in each cannot be accurately forecast for the time period the Corporation is effecting the exit from the mortgage banking business, and
to stop operating its mortgage banking business as a defined segment with separate mortgage banking segment reporting prior to the first quarter of fiscal 2020.

The Corporation also estimates that it will:
incur total one-time costs of approximately $3.6 million to $4.0 million, which amounts include costs for severance, retention, personnel, premises, occupancy, depreciation, and costs related to termination of data processing and other contractual arrangements, and
have estimated cash outlays of approximately $3.5 million to $3.9 million of its total estimated one-time costs (consistent with the amounts above less depreciation).

Once the mortgage banking exit has been completed, the future operations of the Corporation will be much more consistent with the traditional community banking activities as described earlier.

Investment services operations primarily consist of selling alternative investment products such as annuities and mutual funds to the Bank's depositors. Investment services and trustee services contribute a very small percentage of gross revenue.

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.

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.


54

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 March 31, 2019 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
 
$
2,683
   
$
3,744
   
$
1,118
   
$
570
   
$
8,115
 
Pension benefits
   
253
     
505
     
505
     
6,282
     
7,545
 
Time deposits
   
117,104
     
72,065
     
23,725
     
719
     
213,613
 
FHLB – San Francisco advances
   
2,646
     
45,313
     
42,494
     
20,565
     
111,018
 
FHLB – San Francisco letter of credit
   
10,000
     
     
     
     
10,000
 
FHLB – San Francisco MPF credit enhancement (1)
   
     
     
     
2,458
     
2,458
 
Total
 
$
132,686
   
$
121,627
   
$
67,842
   
$
30,594
   
$
352,749
 

(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 March 31, 2019, the Bank serviced $10.4 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.


Comparison of Financial Condition at March 31, 2019 and June 30, 2018

Total assets decreased $56.2 million, or five percent, to $1.12 billion at March 31, 2019 from $1.18 billion at June 30, 2018.  The decrease was primarily attributable to decreases in loans held for investment and loans held for sale, partly offset by increases in cash and cash equivalents and investment securities.

Total cash and cash equivalents, primarily excess cash deposited with the Federal Reserve Bank of San Francisco, increased $18.2 million, or 42 percent, to $61.5 million at March 31, 2019 from $43.3 million at June 30, 2018.  The increase in the total cash and cash equivalents was primarily attributable to the decreases in loans held for sale and loans held for investment, partly offset by the increase in investment securities and the payoff of borrowings and time deposits that matured during the first nine months of fiscal 2019.

55
Investment securities (held to maturity and available for sale) increased $13.5 million, or 14 percent, to $108.8 million at March 31, 2019 from $95.3 million at June 30, 2018. The increase was primarily the result of investment security purchases, partly offset by scheduled and accelerated principal payments on mortgage-backed securities during the first nine months of fiscal 2019. 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 decreased $19.1 million, or two percent, to $883.6 million at March 31, 2019 from $902.7 million at June 30, 2018, primarily due to a $26.2 million decline in multi-family loans, partly offset by a $5.6 million increase in commercial real estate loans.  During the first nine months of fiscal 2019, the Corporation originated $93.8 million of loans held for investment, consisting primarily of single-family, multi-family and commercial real estate loans and also purchased $26.2 million in single-family, multi-family and commercial real estate loans held for investment. Total loan principal payments during the first nine months of fiscal 2019 were $140.5 million, down two percent from $143.9 million during the comparable period in fiscal 2018. The single-family loans held for investment balance was essentially unchanged at $314.8 million at both March 31, 2019 and June 30, 2018, and represented approximately 36 percent and 35 percent of loans held for investment, respectively.

The tables below describe the geographic dispersion of gross real estate secured loans held for investment at March 31, 2019 and June 30, 2018, as a percentage of the total dollar amount outstanding:

As of March 31, 2019
(Dollars In Thousands)
 
Inland
Empire
   
Southern
California (1)
   
Other
California
   
Other
States
   
Total
 
Loan Category
 
Balance
   
%
   
Balance
   
%
   
Balance
   
%
   
Balance
   
%
   
Balance
   
%
 
Single-family
 
$
107,164
     
34
%
 
$
144,261
     
46
%
 
$
62,360
     
20
%
 
$
1,039
     
%
 
$
314,824
     
100
%
Multi-family
   
71,357
     
16
%
   
275,087
     
61
%
   
103,039
     
23
%
   
329
     
%
   
449,812
     
100
%
Commercial real estate
   
31,972
     
28
%
   
55,435
     
48
%
   
27,948
     
24
%
   
     
%
   
115,355
     
100
%
Construction
   
295
     
7
%
   
3,397
     
82
%
   
447
     
11
%
   
     
%
   
4,139
     
100
%
Other
   
     
%
   
     
%
   
167
     
100
%
   
     
%
   
167
     
100
%
Total
 
$
210,788
     
24
%
 
$
478,1801
     
54
%
 
$
193,961
     
22
%
 
$
1,368
     
%
 
$
884,297
     
100
%

(1)
Other than the Inland Empire.

As of June 30, 2018
(Dollars In Thousands)
 
Inland
Empire
   
Southern
California (1)
   
Other
California
   
Other
States
   
Total
 
Loan Category
 
Balance
   
%
   
Balance
   
%
   
Balance
   
%
   
Balance
   
%
   
Balance
   
%
 
Single-family
 
$
110,510
     
35
%
 
$
149,261
     
48
%
 
$
53,960
     
17
%
 
$
1,077
     
%
 
$
314,808
     
100
%
Multi-family
   
76,473
     
16
%
   
287,174
     
60
%
   
109,684
     
23
%
   
2,677
     
1
%
   
476,008
     
100
%
Commercial real estate
   
32,224
     
29
%
   
47,903
     
44
%
   
29,599
     
27
%
   
     
%
   
109,726
     
100
%
Construction
   
49
     
1
%
   
2,685
     
85
%
   
440
     
14
%
   
     
%
   
3,174
     
100
%
Other
   
     
%
   
     
%
   
167
     
100
%
   
     
%
   
167
     
100
%
Total
 
$
219,256
     
24
%
 
$
487,0231
     
54
%
 
$
193,850
     
21
%
 
$
3,754
     
1
%
 
$
903,883
     
100
%

(1)
Other than the Inland Empire.

Loans held for sale decreased $65.8 million, or 68 percent, to $30.5 million at March 31, 2019 from $96.3 million at June 30, 2018.  The decrease was primarily due to a decrease in the loans originated for sale attributable to the winding down of the mortgage banking operations and the timing difference between loan fundings and loan sale settlements. Total loans originated
 
56
for sale during the quarter ended March 31, 2019 was $110.7 million as compared to $241.6 million during the quarter ended June 30, 2018.

Total deposits decreased $30.7 million, or three percent, to $876.9 million at March 31, 2019 from $907.6 million at June 30, 2018.  Transaction accounts decreased $3.3 million to $666.7 million at March 31, 2019 from $670.0 million at June 30, 2018, while time deposits decreased $27.4 million, or 12 percent, to $210.2 million at March 31, 2019 from $237.6 million at June 30, 2018 consistent with the Bank's strategy to decrease the percentage of time deposits in its deposit base.

Total borrowings decreased $25.1 million, or 20 percent, to $101.1 million at March 31, 2019 as compared to $126.2 million at June 30, 2018, due to the maturity of short-term borrowings and an early payoff of a long-term borrowing. The borrowings were primarily comprised of long-term FHLB - San Francisco advances used for interest rate risk management purposes.

Total stockholders' equity increased $752,000, or one percent, to $121.2 million at March 31, 2019 from $120.5 million at June 30, 2018, primarily as a result of net income of $3.6 million and the amortization of stock-based compensation benefits during the first nine months of fiscal 2019, partly offset by $3.1 million of quarterly cash dividends paid to shareholders and stock repurchases from restricted stock recipients to fund their withholding tax obligations.


Comparison of Operating Results for the Quarters and Nine Months Ended March 31, 2019 and 2018

The Corporation's net loss for the third quarter of fiscal 2019 was $151,000, in contrast to the net income of $1.7 million in the same period of fiscal 2018. Compared to the same quarter last year, the decline was primarily attributable to a $1.88 million decrease in the gain on sale of loans and a $484,000 increase in salaries and employee benefits expense, partly offset by the $189,000 benefit from income taxes resulting from the loss before taxes this quarter in contrast to the $667,000 provision for income taxes in the same quarter last year (an $856,000 difference).

For the first nine months of fiscal 2019, the Corporation's net income was $3.6 million, an increase of $2.9 million, or 397 percent, from the net income of $731,000 in the same period of fiscal 2018.  Compared to the same period last year, the increase was primarily attributable to (a) the one-time, non-cash, net tax charge of $1.9 million from the net deferred tax assets revaluation required by the Tax Act consistent with the lower corporate federal income tax rate applied in the second quarter of fiscal 2018 (not replicated this fiscal year), (b) the $3.4 million litigation reserve in the first nine months of fiscal 2018 (not replicated this fiscal year), (c) a $1.8 million increase in net interest income and (d) a $1.9 million decrease in salaries and employee benefits expense and (e) the application of the statutory federal and state income tax rate of 29.56% this current period as compared to the blended tax rate of 35.86% in the same period last year; partly offset by a $5.7 million decrease in the gain on sale of loans.

The Corporation's efficiency ratio, defined as non-interest expense divided by the sum of net interest income and non-interest income, increased to 103 percent for the third quarter of fiscal 2019 from 87 percent in the same period of fiscal 2018. However, for the first nine months of fiscal 2019, the Corporation's efficiency ratio improved to 89 percent from 93 percent for the same period of fiscal 2018.

Return (loss) on average assets decreased 64 basis points to (0.05) percent in the third quarter of fiscal 2019 from 0.59 percent in the same period last year. However for the first nine months of fiscal 2019, return on average assets was 0.42 percent, up 34 basis points from 0.08 percent in the same period last year.

Return (loss) on average equity was (0.49) percent in the third quarter of fiscal 2019 as compared to 5.76 percent in the same period last year. However for the first nine months of fiscal 2019, return on average equity was 3.97 percent compared to 0.78 percent for the same period last year.
 
57

Diluted earnings (loss) per share for the third quarter of fiscal 2019 were $(0.02), down 109 percent from $0.23 in the same period last year. However for the first nine months of fiscal 2019, diluted earnings per share were $0.48, up 433 percent from $0.09 in the same period last year.

Net Interest Income:

For the Quarters Ended March 31, 2019 and 2018.  Net interest income increased by $488,000, or five percent, to $9.6 million for the third quarter of fiscal 2019 as compared to the same period in fiscal 2018, as a result of a higher net interest margin, partly offset by a lower average interest-earning asset balance. The net interest margin increased 30 basis points to 3.53 percent in the third quarter of fiscal 2019 from 3.23 percent in the same period of fiscal 2018, primarily due to an increase in the average yield on interest-earning assets, partly offset by a slight increase in the average cost of interest-bearing liabilities. The weighted-average yield on interest-earning assets increased by 31 basis points to 4.09 percent in the third quarter of fiscal 2019 from 3.78 percent in the same quarter last year, while the weighted-average cost of interest-bearing liabilities increased by one basis point to 0.63 percent for the third quarter of fiscal 2019 as compared to 0.62 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 all interest-earning assets resulting primarily from higher market interest rates, except FHLB – San Francisco stock. The average balance of interest-earning assets decreased $41.4 million, or four percent, to $1.09 billion in the third quarter of fiscal 2019 from $1.13 billion in the comparable period of fiscal 2018, primarily reflecting a decrease in the average balance of loans receivable, partly offset by increases in the average balance of investment securities and interest-earning deposits. The average balance of interest-bearing liabilities decreased by $45.6 million, or four percent, to $979.0 million in the third quarter of fiscal 2019 from $1.02 billion in the same quarter last year.

For the Nine Months Ended March 31, 2019 and 2018.  Net interest income increased $1.8 million, or seven percent, to $28.8 million for the first nine months of fiscal 2019 from $27.0 million for the comparable period in fiscal 2018, due to a higher net interest margin, partly offset by a lower average interest-earning assets balance. The net interest margin was 3.45 percent in the first nine months of fiscal 2019, up 29 basis points from 3.16 percent in the same period of fiscal 2018, primarily due to an increase in the average yield on interest-earning assets, partly offset by a slight increase in the average cost of interest-bearing liabilities.  The net interest margin in the nine months of fiscal 2019 was augmented by $176,000 of previously unrecognized loan interest income resulting from the payoff of three non-performing loans and the $133,000 special cash dividend received on FHLB-San Francisco stock, which increased the net interest margin by approximately three basis points for the period. The weighted-average yield on interest-earning assets increased by 31 basis points to 4.03 percent, while the weighted-average cost of interest-bearing liabilities increased by two basis points to 0.64 percent for the first nine months of fiscal 2019 as compared to the same period last year.  The average balance of interest-earning assets decreased $28.5 million, or two percent, to $1.11 billion in the first nine months of fiscal 2019 from $1.14 billion in the comparable period of fiscal 2018, primarily reflecting a decrease in the average balance of loans receivable, partly offset by increases in the average balance of investment securities and interest earning deposits. The average balance of interest-bearing liabilities decreased by $28.9 million, or three percent, to $1.00 billion in the first nine months of fiscal 2019 from $1.03 billion in the same period last year.

Interest Income:

For the Quarters Ended March 31, 2019 and 2018.  Total interest income increased by $441,000, or four percent, to $11.1 million for the third quarter of fiscal 2019 as compared to the same quarter of fiscal 2018.  The increase was primarily due to an increase in interest income from investment securities and interest-earning deposits.

Interest income on loans receivable increased $78,000, or one percent, to $10.0 million in the third quarter of fiscal 2019 as compared to the same quarter of fiscal 2018.  This increase was attributable to a higher average loan yield reflecting the rise in interest rates over the last year, partly offset by a lower average loan balance. The average loans receivable yield during the third quarter of fiscal 2019 increased 25 basis points to 4.38 percent from 4.13 percent during the same quarter last year, primarily due to increases in the average yield of both loans held for investment and loans held for sale combined with a lower
 
58
percentage of loans held for sale to total loans receivable. The average balance of loans receivable decreased by $46.8 million, or five percent, to $915.0 million for the third quarter of fiscal 2019 from $961.8 million in the same quarter of fiscal 2018, primarily due to a decrease in average loans held for sale attributable to the winding down of the mortgage banking operations and, to a lesser extent, a decrease in average loans held for investment. 

Loans receivable is comprised of loans held for investment and loans held for sale. The average balance of loans held for investment decreased $13.1 million, or one percent, to $875.5 million during the third quarter of fiscal 2019 from $888.6 million in the same quarter of fiscal 2018. The average yield on the loans held for investment increased by 23 basis points to 4.36 percent in the third quarter of fiscal 2019 from 4.13 percent in the same quarter of fiscal 2018. The average balance of loans held for sale also decreased $33.8 million, or 46 percent, to $39.5 million during the third quarter of fiscal 2019 from $73.3 million in the same quarter of fiscal 2018.  The average yield on the loans held for sale increased by 61 basis points to 4.74 percent in the third quarter of fiscal 2019 from 4.13 percent in the same quarter of fiscal 2018.

Interest income from investment securities increased $210,000, or 55 percent, to $592,000 in the third quarter of fiscal 2019 from $382,000 for the same quarter of fiscal 2018. This increase was primarily attributable to a higher average yield.  The average investment securities yield increased 78 basis points to 2.32 percent in the third quarter of fiscal 2019 from 1.54 percent in the same quarter of fiscal 2018. 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 and the repricing of adjustable mortgage-backed securities to higher interest rates, partly offset by accelerated amortization of purchase premiums resulting from accelerated principal payments. The average balance of investment securities increased $2.5 million, or three percent, to $101.9 million in the third quarter of fiscal 2019 from $99.4 million in the same quarter of fiscal 2018. The increase in the 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 third quarter of fiscal 2019 was $144,000, unchanged from the same quarter of fiscal 2018.  The average balance in the third quarter of fiscal 2019 increased $91,000, or one percent, to $8.2 million from $8.1 million in the same quarter of fiscal 2018, attributable to a required stock purchase due to reduced borrowings of $91,000 in April 2018.   As a result, the average yield decreased to 7.03 percent in the third quarter of fiscal 2019 as compared to 7.10 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 $386,000 in the third quarter of fiscal 2019, up 66 percent from $233,000 in the same quarter of fiscal 2018.  The increase was primarily due to a higher average yield.  The average yield earned on interest-earning deposits increased 89 basis points to 2.40 percent in the third quarter of fiscal 2019 from 1.51 percent in the comparable quarter last year, due primarily to the increases in the targeted federal funds rate over the last year.  The average balance of the interest-earning deposits in the third quarter of fiscal 2019 was $64.4 million, an increase of $2.8 million or five percent, from $61.6 million in the same quarter of fiscal 2018. The increase in the average balance of interest-earning deposits was primarily due to the decreases in loans held for investment and loans held for sale, partly offset by an increase in investment securities and decreases in deposits and borrowings.

For the Nine Months Ended March 31, 2019 and 2018.  Total interest income increased by $1.8 million, or six percent, to $33.6 million for the first nine months of fiscal 2019 from $31.8 million in the same period of fiscal 2018.  The increase was primarily due to an increase in interest income from all interest-earning assets.

Loans receivable interest income increased $691,000, or two percent, to $30.5 million in the first nine months of fiscal 2019 from $29.8 million for the same period of fiscal 2018.  The increase was attributable to a higher average loan yield reflecting the rise in interest rates over the last year, partly offset by a lower average loan balance in the first nine months of fiscal 2019 in comparison to the same period last year.  The average loan yield, including loans held for sale, during the first nine months of fiscal 2019 increased 29 basis points to 4.32 percent from 4.03 percent in the same period last year. The average balance of
 
59
loans receivable, including loans held for sale, decreased $45.7 million, or five percent, to $941.3 million for the first nine months of fiscal 2019 from $987.0 million in the same period of fiscal 2018.

Loans receivable is comprised of loans held for investment and loans held for sale.  The average balance of loans held for investment decreased $13.3 million, or one percent, to $882.3 million during the first nine months of fiscal 2019 from $895.6 million in the same period of fiscal 2018.  The average yield on the loans held for investment increased by 26 basis points to 4.30 percent in the first nine months of fiscal 2019 from 4.04 percent in the same period of fiscal 2018.  The average balance of loans held for sale decreased by $32.4 million, or 35 percent, to $59.0 million during the first nine months of fiscal 2019 from $91.4 million in the same period of fiscal 2018.  The average yield on the loans held for sale increased by 74 basis points to 4.71 percent in the first nine months of fiscal 2019 from 3.97 percent in the same period of fiscal 2018.

Interest income from investment securities increased $423,000, or 44 percent, to $1.4 million in the first nine months of fiscal 2019 from $958,000 for the same period of fiscal 2018. This increase was attributable to a higher average yield and, to a lesser extent, a higher average balance. The average investment securities yield increased 47 basis points to 1.93 percent in the first nine months of fiscal 2019 from 1.46 percent in the same period of fiscal 2018.  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 and the repricing of adjustable rate mortgage-backed securities to higher interest rates, partly offset by accelerated amortization of purchase premiums resulting from accelerated principal payments. The average balance of investment securities increased $7.8 million, or nine percent, to $95.5 million in the first nine months of fiscal 2019 from $87.7 million in the same period of fiscal 2018. The increase in the 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 nine months of fiscal 2019 was $565,000, up 32 percent from $428,000 in the same period of fiscal 2018, primarily attributable to a special cash dividend of $133,000 received in December 2018. As a result, the average yield increased to 9.19 percent in the first nine months of fiscal 2019 as compared to 7.04 percent in the comparable period last year.

Interest income from interest-earning deposits, primarily cash deposited at the Federal Reserve Bank of San Francisco, was $1.1 million in the first nine months of fiscal 2019, up 88 percent from $591,000 in the same period of fiscal 2018.  The increase was due to a higher average yield and, to a lesser extent, a higher average balance in the first nine months of fiscal 2019 as compared to the same period last year.  The average yield increased 84 basis points to 2.20 percent in the first nine months of fiscal 2019 from 1.36 percent in the comparable period last year, due primarily to the increases in the targeted federal funds rate over the last year. The average balance of the interest-earning deposits in the first nine months of fiscal 2019 was $66.5 million, an increase of $9.2 million or 16 percent, from $57.3 million in the same period of fiscal 2018.  The increase in average balance of interest-earning deposits was primarily due to the decreases in loans held for investment and loans held for sale, partly offset by an increase in investment securities and a decrease in deposits.

Interest Expense:

For the Quarters Ended March 31, 2019 and 2018.  Total interest expense decreased $47,000, or three percent to $1.5 million in the third quarter of fiscal 2019 from $1.6 million in the comparable quarter of fiscal 2018. This decrease was attributable to lower interest expenses on both deposits and borrowings.

Interest expense on deposits for the third quarter of fiscal 2019 was $841,000 as compared to $856,000 for the same period last year, a decrease of $15,000, or two percent.  The decrease in interest expense on deposits was primarily attributable to a lower average balance, partly offset by a slightly higher average cost of deposits. The average balance of deposits decreased $38.7 million, or four percent, to $873.3 million during the quarter ended March 31, 2019 from $912.0 million during the same period last year. The decrease in the average balance was primarily attributable to decreases in time deposits and, to a lesser extent,
 
60
savings deposits, partly offset by an increase in checking and money market deposits. The average cost of deposits remained relatively stable, increasing only one basis point to 0.39 percent during the third quarter of fiscal 2019 from 0.38 percent during the same quarter last year.  The increase in the average cost of deposits was attributable primarily to a higher average cost of time deposits, partly offset by 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 average balance of transaction accounts to total deposits in the third quarter of fiscal 2019 was 75 percent, compared to 73 percent in the same period of fiscal 2018.

Interest expense on borrowings, consisting of FHLB – San Francisco advances, for the third quarter of fiscal 2019 decreased $32,000, or four percent, to $680,000 from $712,000 for the same period last year.  The decrease in interest expense on borrowings was the result of a lower average balance, partly offset by a higher average cost. The average balance of borrowings decreased $6.8 million, or six percent, to $105.8 million during the quarter ended March 31, 2019 from $112.6 million during the same period last year, primarily due to the $10.0 million prepayment of long-term borrowings in February 2019. The average cost of borrowings increased five basis points to 2.61 percent for the quarter ended March 31, 2019 from 2.56 percent in the same quarter last year. The increase in the average cost of borrowings was primarily due to the prepayment of long-term borrowings with a lower interest rate in than the weighted average interest rate of all borrowings.

For the Nine Months Ended March 31, 2019 and 2018.  Total interest expense for the first nine months of fiscal 2019 decreased $36,000, or one percent, to $4.8 million as compared to the same period last year.  This decrease was attributable to lower interest expenses on both, deposits and borrowings.

Interest expense on deposits for the first nine months of fiscal 2019 decreased $18,000, or one percent, to $2.6 million as compared to the same period last year.  The slight decrease in interest expense on deposits was primarily attributable to a lower average balance, partly offset by a higher average cost of deposits. The average balance of deposits decreased $28.4 million, or three percent, to $888.7 million during the nine months ended March 31, 2019 from $917.1 million during the same period last year. The decrease in the average balance was primarily attributable to decreases in time deposits and, to a lesser extent, savings deposits, partly offset by an increase in checking and money market deposits. The average cost of deposits increased one basis point to 0.39 percent during the first nine months of fiscal 2019 from 0.38 percent during the same period last year. The increase in the average cost of deposits was attributable primarily to a higher average cost of time deposits, partly offset by a lower percentage of time deposits to the total deposit balance. The average balance of transaction accounts to total deposits in the first nine months of fiscal 2019 was 74 percent, compared to 72 percent in the same period of fiscal 2018.

Interest expense on borrowings, consisting of FHLB – San Francisco advances, for the first nine months of fiscal 2019 decreased $18,000, or one percent, to $2.2 million as compared to the same period last year.  The decrease in interest expense on borrowings was the result of a lower average cost and to a lesser extent, a lower average balance. The average cost of borrowings decreased one basis point to 2.56 percent for the nine months ended March 31, 2019 from 2.57 percent in the same period last year. The average balance of borrowings decreased by $403,000 to $112.4 million during the nine months ended March 31, 2019 from $112.8 million during the same period last year.

61
The following tables present the average balance sheets for the quarters and nine months ended March 31, 2019 and 2018, respectively:

Average Balance Sheets
   
Quarter Ended
March 31, 2019
   
Quarter Ended
March 31, 2018
 
(Dollars In Thousands)
 
Average
Balance
   
Interest
   
Yield/
Cost
   
Average
Balance
   
Interest
   
Yield/
Cost
 
Interest-earning assets:
                                   
Loans receivable, net (1)
 
$
915,049
   
$
10,011
     
4.38
%
 
$
961,826
   
$
9,933
     
4.13
%
Investment securities
   
101,851
     
592
     
2.32
%
   
99,390
     
382
     
1.54
%
FHLB – San Francisco stock
   
8,199
     
144
     
7.03
%
   
8,108
     
144
     
7.10
%
Interest-earning deposits
   
64,390
     
386
     
2.40
%
   
61,591
     
233
     
1.51
%
                                                 
Total interest-earning assets
   
1,089,489
     
11,133
     
4.09
%
   
1,130,915
     
10,692
     
3.78
%
                                                 
Non interest-earning assets
   
30,228
                     
34,820
                 
                                                 
Total assets
 
$
1,119,717
                   
$
1,165,735
                 
                                                 
Interest-bearing liabilities:
                                               
Checking and money market accounts (2)
 
$
382,294
   
$
102
     
0.11
%
 
$
370,346
   
$
96
     
0.11
%
Savings accounts
   
274,400
     
139
     
0.21
%
   
293,579
     
147
     
0.20
%
Time deposits
   
216,558
     
600
     
1.12
%
   
248,104
     
613
     
1.00
%
                                                 
Total deposits
   
873,252
     
841
     
0.39
%
   
912,029
     
856
     
0.38
%
                                                 
Borrowings
   
105,793
     
680
     
2.61
%
   
112,625
     
712
     
2.56
%
                                                 
Total interest-bearing liabilities
   
979,045
     
1,521
     
0.63
%
   
1,024,654
     
1,568
     
0.62
%
                                                 
Non interest-bearing liabilities
   
17,991
                     
20,804
                 
                                                 
Total liabilities
   
997,036
                     
1,045,458
                 
                                                 
Stockholders' equity
   
122,681
                     
120,277
                 
Total liabilities and stockholders' equity
 
$
1,119,717
                   
$
1,165,735
                 
                                                 
Net interest income
         
$
9,612
                   
$
9,124
         
                                                 
Interest rate spread (3)
                   
3.46
%
                   
3.16
%
Net interest margin (4)
                   
3.53
%
                   
3.23
%
Ratio of average interest-earning assets to
   average interest-bearing liabilities
                   
111.28
%
                   
110.37
%
Return (loss) on average assets
                   
(0.05
)%
                   
0.59
%
Return (loss) on average equity
                   
(0.49
)%
                   
5.76
%

(1)
Includes loans held for sale and non-performing loans, as well as net deferred loan cost amortization of $179 and $120 for the quarters ended March 31, 2019 and 2018, respectively.
(2)
Includes the average balance of non interest-bearing checking accounts of $83.1 million and $78.9 million during the quarters ended March 31, 2019 and 2018, 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.
 
62
   
Nine Months Ended
March 31, 2019
   
Nine Months Ended
March 31, 2018
 
(Dollars In Thousands)
 
Average
Balance
   
Interest
   
Yield/
Cost
   
Average
Balance
   
Interest
   
Yield/
Cost
 
Interest-earning assets:
                                   
Loans receivable, net (1)
 
$
941,336
   
$
30,516
     
4.32
%
 
$
986,952
   
$
29,825
     
4.03
%
Investment securities
   
95,494
     
1,381
     
1.93
%
   
87,710
     
958
     
1.46
%
FHLB – San Francisco stock
   
8,199
     
565
     
9.19
%
   
8,108
     
428
     
7.04
%
Interest-earning deposits
   
66,498
     
1,111
     
2.20
%
   
57,254
     
591
     
1.36
%
                                                 
Total interest-earning assets
   
1,111,527
     
33,573
     
4.03
%
   
1,140,024
     
31,802
     
3.72
%
                                                 
Non interest-earning assets
   
30,711
                     
33,240
                 
                                                 
Total assets
 
$
1,142,238
                   
$
1,173,264
                 
                                                 
Interest-bearing liabilities:
                                               
Checking and money market accounts (2)
 
$
379,882
   
$
327
     
0.11
%
 
$
372,413
   
$
311
     
0.11
%
Savings accounts
   
281,814
     
437
     
0.21
%
   
290,065
     
445
     
0.20
%
Time deposits
   
226,978
     
1,851
     
1.09
%
   
254,653
     
1,877
     
0.98
%
                                                 
Total deposits
   
888,674
     
2,615
     
0.39
%
   
917,131
     
2,633
     
0.38
%
                                                 
Borrowings
   
112,363
     
2,158
     
2.56
%
   
112,766
     
2,176
     
2.57
%
                                                 
Total interest-bearing liabilities
   
1,001,037
     
4,773
     
0.64
%
   
1,029,897
     
4,809
     
0.62
%
                                                 
Non interest-bearing liabilities
   
19,306
                     
19,174
                 
                                                 
Total liabilities
   
1,020,343
                     
1,049,071
                 
                                                 
Stockholders' equity
   
121,895
                     
124,193
                 
Total liabilities and stockholders' equity
 
$
1,142,238
                   
$
1,173,264
                 
                                                 
Net interest income
         
$
28,800
                   
$
26,993
         
                                                 
Interest rate spread (3)
                   
3.39
%
                   
3.10
%
Net interest margin (4)
                   
3.45
%
                   
3.16
%
Ratio of average interest-earning assets to
   average interest-bearing liabilities
                   
111.04
%
                   
110.69
%
Return on average assets
                   
0.42
%
                   
0.08
%
Return on average equity
                   
3.97
%
                   
0.78
%

(1)
Includes loans held for sale and non-performing loans, as well as net deferred loan cost amortization of $823 and $736 for the nine months ended March 31, 2019 and 2018, respectively.
(2)
Includes the average balance of non interest-bearing checking accounts of $82.7 million and $79.1 million during the nine months ended March 31, 2019 and 2018, 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.

63
The following tables set forth the effects of changing rates and volumes on interest income and expense for the quarters and nine months ended March 31, 2019 and 2018, 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 March 31, 2019 Compared
To Quarter Ended March 31, 2018
Increase (Decrease) Due to
 
(In Thousands)
 
Rate
   
Volume
   
Rate/
Volume
   
Net
 
Interest-earning assets:
                       
     Loans receivable (1)
 
$
590
   
$
(483
)
 
$
(29
)
 
$
78
 
     Investment securities
   
196
     
9
     
5
     
210
 
     FHLB – San Francisco stock
   
(2
)
   
2
     
     
 
     Interest-earning deposits
   
136
     
11
     
6
     
153
 
Total net change in income on interest-earning assets
   
920
     
(461
)
   
(18
)
   
441
 
                                 
Interest-bearing liabilities:
                               
     Checking and money market accounts
   
     
6
     
     
6
 
     Savings accounts
   
1
     
(9
)
   
     
(8
)
     Time deposits
   
74
     
(78
)
   
(9
)
   
(13
)
     Borrowings
   
12
     
(43
)
   
(1
)
   
(32
)
Total net change in expense on interest-bearing liabilities
   
87
     
(124
)
   
(10
)
   
(47
)
Net increase (decrease) in net interest income
 
$
833
   
$
(337
)
 
$
(8
)
 
$
488
 

(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.
 
 
64

   
Nine Months Ended March 31, 2019 Compared
To Nine Months Ended March 31, 2018
Increase (Decrease) Due to
 
(In Thousands)
 
Rate
   
Volume
   
Rate/
Volume
   
Net
 
Interest-earning assets:
                       
     Loans receivable (1)
 
$
2,169
   
$
(1,379
)
 
$
(99
)
 
$
691
 
     Investment securities
   
311
     
85
     
27
     
423
 
     FHLB – San Francisco stock
   
131
     
5
     
1
     
137
 
     Interest-bearing deposits
   
368
     
94
     
58
     
520
 
Total net change in income on interest-earning assets
   
2,979
     
(1,195
)
   
(13
)
   
1,771
 
                                 
Interest-bearing liabilities:
                               
     Checking and money market accounts
   
     
16
     
     
16
 
     Savings accounts
   
5
     
(12
)
   
(1
)
   
(8
)
     Time deposits
   
201
     
(204
)
   
(23
)
   
(26
)
     Borrowings
   
(10
)
   
(8
)
   
     
(18
)
Total net change in expense on interest-bearing liabilities
   
196
     
(208
)
   
(24
)
   
(36
)
Net increase (decrease) in net interest income
 
$
2,783
   
$
(987
)
 
$
11
   
$
1,807
 

(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 March 31, 2019 and 2018.  During the third quarter of fiscal 2019, the Corporation recorded a provision for loan losses of $4,000, in contrast to a recovery from the allowance for loan losses of $505,000 in the same period of fiscal 2018.  The recovery from the allowance for loan losses during the same quarter last year was primarily attributable to the improving risk profile of the loan portfolio as reflected in the asset quality ratios and loan balances shifting to lower risk categories from higher risk categories. Non-performing loans, net of the allowance for loan losses and fair value adjustments remained relatively unchanged at $6.1 million at both March 31, 2019 and June 30, 2018 but lower than the $6.8 million at March 31, 2018. Net loan recoveries in the third quarter of fiscal 2019 were $15,000 or 0.01 percent (annualized) of average loans receivable, compared to net loan charge offs of $39,000 or 0.02 percent (annualized) of average loans receivable in the same quarter of fiscal 2018. Total classified loans, net of the allowance for loan losses and fair value adjustments, were $14.8 million at March 31, 2019 as compared to $14.9 million at June 30, 2018 and $11.1 million at March 31, 2018. Classified loans net of the allowance for loan losses and fair value adjustments were comprised of $7.3 million and $7.5 million of loans in the special mention category and $7.5 million and $7.4 million of loans in the substandard category at March 31, 2019 and June 30, 2018, respectively.

For the Nine Months Ended March 31, 2019 and 2018.  During the first nine months of fiscal 2019, the Corporation recorded a recovery from the allowance for loan losses of $450,000, as compared to a $347,000 recovery from the allowance for loan losses in the same period of fiscal 2018. The recovery from the allowance for loan losses in the first nine months of fiscal 2019 was primarily attributable to the decrease in loans held for investment and the recoveries related to the payoff of the two non-performing loans during the first nine months of fiscal 2019.  Net loan recoveries in the first nine months of fiscal 2019 were $145,000 or (0.02) percent (annualized) of average loans receivable, in contrast to net loan charge offs of $161,000 or 0.02 percent (annualized) of average loans receivable in the same period of fiscal 2018.

65
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 March 31, 2019, the allowance for loan losses was $7.1 million, comprised of collectively evaluated allowances of $6.9 million and individually evaluated allowances of $132,000; in comparison to the allowance for loan losses of $7.4 million at June 30, 2018, comprised of collectively evaluated allowances of $7.2 million and individually evaluated allowances of $157,000. The allowance for loan losses as a percentage of gross loans held for investment was 0.79 percent at March 31, 2019 as compared to 0.81 percent at June 30, 2018. 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 March 31, 2019 and 2018.  Total non-interest income decreased $2.1 million, or 40 percent, to $3.1 million for the quarter ended March 31, 2019 from $5.2 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 $1.9 million, or 53 percent, to $1.7 million for the third quarter of fiscal 2019 from $3.6 million in the same quarter of fiscal 2018 reflecting the impact of a lower loan sale volume, partly offset by a higher 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 $139.7 million or 59 percent to $95.8 million in the quarter ended March 31, 2019 from $235.5 million in the comparable quarter last year.  The decrease in loan sale volume was attributable to the winding down of the mortgage banking operations. Refinance loans as a percentage of total loans originated by PBM during the third quarter of fiscal 2019 was 30 percent, down from 37 percent in the same quarter of fiscal 2018.  Retail loans as a percentage of total loans originated for sale by PBM during the third quarter of fiscal 2019 were 65 percent, up from 59 percent in the same quarter of fiscal 2018. The average loan sale margin for PBM increased 26 basis points to 1.79 percent in the third quarter of fiscal 2019 from 1.53 percent in the same period of fiscal 2018. The increase in the average loan sale margin was the result of a higher percentage of retail loan production (which generally has higher loan sale margins) versus wholesale loan production and maintaining pricing discipline throughout the quarter. 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 $778,000 in the third quarter of fiscal 2019 as compared to a net loss of $844,000 in the same period last year. The fair-value adjustment on loans held for sale and derivative financial instruments is consistent with the Bank's mortgage banking activity and the volatility of mortgage interest rates. As of March 31, 2019, the fair value of derivative financial instruments pursuant to ASC 815 and ASC 825 was $951,000, compared to $2.9 million at June 30, 2018 and $2.8 million at March 31, 2018.

For the Nine Months Ended March 31, 2019 and 2018.  Total non-interest income decreased $6.1 million, or 35 percent, to $11.2 million for the nine months ended March 31, 2019 from $17.3 million for the same period last year.  The decrease was primarily attributable to a decrease in the gain on sale of loans.

The net gain on sale of loans decreased $5.7 million, or 44 percent, to $7.1 million for the first nine months of fiscal 2019 from $12.8 million in the same period of fiscal 2018 reflecting the impact of a lower loan sale volume, partly offset by a higher average loan sale margin.  Total loan sale volume was $408.9 million in the first nine months ended March 31, 2019, down $506.5 million, or 55 percent, from $915.4 million in the comparable period last year.  The decrease in loan sale volume was attributable primarily to the winding down of the mortgage banking operations.  Refinance loans as a percentage of total loans originated by PBM during the first nine months of fiscal 2019 were 29 percent, down from 41 percent in the same period of
 
66
fiscal 2018. Retail loans as a percentage of total loans originated for sale by PBM during the first nine months of fiscal 2019 were 64 percent, up from 56 percent in the same period of fiscal 2018. The average loan sale margin for PBM during the first nine months of fiscal 2019 was 1.73 percent, up 34 basis points from 1.39 percent for the same period of fiscal 2018.  The increase in the average loan sale margin was the result of a higher percentage of retail loan production (which generally has higher loan sale margins) versus wholesale loan production and maintaining pricing discipline throughout the period. The gain on sale of loans includes an unfavorable fair-value adjustment on derivative financial instruments pursuant to ASC 815 and ASC 825, a net loss of $1.9 million in the first nine months of fiscal 2019 as compared to a net loss of $2.2 million in the same period last year.

Non-Interest Expense:

For the Quarters Ended March 31, 2019 and 2018.  Total non-interest expense in the quarter ended March 31, 2019 was $13.0 million, an increase of $561,000, or five percent, as compared to $12.4 million in the quarter ended March 31, 2018. The increase was primarily a result of an increase in salaries and employee benefits expense.

Total salaries and employee benefits expense increased $484,000, or five percent, to $9.3 million in the third quarter of fiscal 2019 from $8.8 million in the same period of fiscal 2018.  The increase in salaries and employee benefits expense was primarily attributable to $1.5 million of one-time costs associated with staff reductions in mortgage banking operations and $674,000 in current costs associated with incentive compensation accruals, partly offset by lower variable compensation resulting from lower mortgage banking loan originations. Total loan originations and purchases (including loans originated and purchased for investment and loans originated for sale) decreased $114.8 million, or 43 percent, to $154.7 million in the third quarter of fiscal 2019 from $269.5 million in the comparable quarter of fiscal 2018. Total full-time equivalent employees in the mortgage banking division were 107 at March 31, 2019, down 47 percent from 200 at March 31, 2018.

On January 30, 2019, the Corporation announced that Bank will close its La Quinta Branch effective at the close of business on May 10, 2019. The Bank anticipates an annual operational cost savings of approximately $473,000, primarily in salaries and employee benefits expenses and premises and occupancy expenses subsequent to the branch closure. Total one-time charges for the branch closure will be approximately $18,000.

On February 4, 2019, the Corporation announced that the Corporation's Board of Directors determined that it was in the long-term best interests of the Corporation to exit the operations of the Corporation's mortgage banking segment conducted through PBM. The Corporation estimates that it will incur one-time costs of approximately $3.6 million to $4.0 million to complete the exit during the remainder of fiscal 2019, which amounts include costs for severance, retention, personnel, premises, occupancy, depreciation, and costs related to termination of data processing and other contractual arrangements. As of March 31, 2019, the total one-time costs incurred were $1.6 million, comprised of $1.5 million in salaries and employee benefits expenses, $81,000 in premises and occupancy expenses, and $13,000 in equipment expenses.

For the Nine Months Ended March 31, 2019 and 2018.  Total non-interest expense in the nine months ended March 31, 2019 was $35.6 million, a decrease of $5.8 million or 14 percent, as compared to $41.4 million in the same period ended March 31, 2018.  The decrease was primarily due to decreases in salaries and employee benefits expense and in other non-interest expense.

Total salaries and employee benefits expense decreased $1.9 million, or seven percent, to $24.8 million in the first nine months of fiscal 2019 from $26.7 million in the same period of fiscal 2018.  The decrease was primarily attributable to lower incentive compensation costs and PBM staff reductions related to lower mortgage banking loan originations attributable to the winding down of the mortgage banking operations, partly offset by one-time costs associated with staff reductions in mortgage banking operations and incentive compensation accruals. Total loan originations and purchases (including loans originated and purchased for investment and loans originated for sale) decreased $500.0 million, or 47 percent, to $573.4 million in the first nine months of fiscal 2019 from $1.07 billion in the comparable period of fiscal 2018.

67
Total other non-interest expenses decreased $3.8 million, or 55 percent, to $3.1 million in the first nine months of fiscal 2019 from $6.9 million in the same period of fiscal 2018. The decrease in other non-interest expenses was primarily attributable to litigation settlement expense of $3.4 million in the first nine months of fiscal 2018, not replicated this current period.  No additional contingencies exist regarding these legal matters although the settlement agreements remain subject to court approval and other customary conditions. For additional information see Part II, Item 1, "Legal Proceedings."

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, earnings from 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 March 31, 2019 and 2018.  The Corporation's income tax benefit was $189,000 for the third quarter of fiscal 2019, in contrast to a $667,000 tax provision in the same quarter last year (an $856,000 difference). The decrease was attributable to loss before taxes and a lower federal income tax rate in the third quarter of fiscal 2019 in comparison to income before taxes in the same quarter last year. Since the Corporation has a fiscal year end of June 30th, the reduced federal corporate income tax rate from the Tax Act for fiscal 2018 was the result of the application of a blended federal statutory tax rate of 28.06%, and is a flat 21% federal corporate income tax rate for fiscal 2019 and thereafter. The effective income tax rate for the quarter ended March 31, 2019 and 2018 was 55.59% and 27.79%, respectively. The higher effective tax rate in the third quarter of fiscal 2019 was due primarily to tax benefits resulting from stock-based compensation activities. The Corporation believes that the effective income tax rate applied in the third quarter of fiscal 2019 reflects its current income tax obligations.

For the Nine Months Ended March 31, 2019 and 2018.  The Corporation's provision for income taxes was $1.2 million for the first nine months of fiscal 2019, down 52 percent from the $2.5 million provision for income taxes in the same period last year. The decrease in the provision for income taxes was primarily attributable to the one-time, non-cash, net tax charge of $1.9 million from the net deferred tax assets revaluation and the reduction in the federal corporate income tax rate resulting from the Tax Act, partly offset by the higher income before taxes recorded in the second quarter of fiscal 2018.  The effective income tax rate for the nine months ended March 31, 2019 and 2018 was 25.42% and 77.56%, respectively. The Corporation believes that the effective income tax rate applied in the first nine months of fiscal 2019 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, remained unchanged at $6.1 million at both March 31, 2019 June 30, 2018. Non-performing loans as a percentage of loans held for investment at March 31, 2019 was 0.69%, up from 0.67% at June 30, 2018.  The non-performing loans at March 31, 2019 are comprised of 20 single-family loans ($5.3 million), one construction loan ($745,000) and one commercial business loan ($44,000).  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 March 31, 2019, total restructured loans decreased $601,000, or 12 percent, to $4.6 million from $5.2 million at June 30, 2018.  At March 31, 2019 and June 30, 2018, $2.7 million and $3.4 million of these restructured loans were classified as non-performing, respectively.  As of March 31, 2019, $2.9 million, or 63 percent, of the restructured loans have a current payment status, consistent with their modified payment terms; this compares to $2.9 million, or 56 percent, of restructured loans that had a current payment status, consistent with their modified payment terms as of June 30, 2018.

68
There was no real estate owned at March 31, 2019 as compared to $906,000 at June 30, 2018 (two single-family properties located in California).

Non-performing assets, which includes non-performing loans and real estate owned, decreased $848,000 or 12 percent to $6.1 million or 0.55 percent of total assets at March 31, 2019 from $7.0 million or 0.59 percent of total assets at June 30, 2018. 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 nine months of fiscal 2019, the Corporation repurchased five loans totaling $699,000, including two loans that were fully charged off ($25,000). In comparison, the Corporation repurchased two loans totaling $602,000 from investors during the first nine months of fiscal 2018. 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 nine months of fiscal 2019 and 2018, the Corporation recorded a $33,000 recovery and a $22,000 recovery from the recourse liability, respectively, and did not settle any claims.  As of March 31, 2019, the total recourse reserve for loans sold that are subject to repurchase decreased to $250,000, as compared to $283,000 at both June 30, 2018 and March 31, 2018.

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 and nine months ended March 31, 2019 and 2018:
   
For the Quarters Ended
March 31,
   
For the Nine Months Ended
March 31,
 
Recourse Liability
 
2019
   
2018
   
2019
   
2018
 
(In Thousands)
                       
                         
Balance, beginning of the period
 
$
250
   
$
283
   
$
283
   
$
305
 
Recovery from recourse liability
   
     
     
(33
)
   
(22
)
Net settlements in lieu of loan repurchases
   
     
     
     
 
Balance, end of the period
 
$
250
   
$
283
   
$
250
   
$
283
 

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, fires 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
 
69
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 March 31, 2019:
(Dollars In Thousands)
 
Outstanding
Balance (1)
 
Weighted-
Average
FICO (2)
 
Weighted-
Average
LTV (3)
 
Weighted-
Average
Seasoning (4)
Interest only
 
$
1,500
   
619
   
75%
 
1.21 years
Stated income (5)
 
$
56,323
   
733
   
58%
 
13.33 years
FICO less than or equal to 660
 
$
7,656
   
638
   
65%
 
8.22 years
Over 30-year amortization
 
$
7,528
   
726
   
63%
 
13.63 years

(1)
The outstanding balance presented on this table may overlap more than one category.  Of the outstanding balance, $2.9 million of "stated income," $300 of "FICO less than or equal to 660," and $214 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 March 31, 2019:
(Dollars In Thousands)
 
Balance
   
Non-Performing (1)
   
30 - 89 Days
Delinquent (1)
 
Fully amortize in the next 12 months
 
$
1,500
     
—%
 
   
—%
 
Fully amortize between 1 year and 5 years
   
     
—%
 
   
—%
 
Fully amortize after 5 years
   
     
—%
 
   
—%
 
Total
 
$
1,500
     
—%
 
   
—%
 

(1)
As a percentage of each category.

70
The following table summarizes the interest rate reset (repricing) schedule of the Corporation's stated income single-family, first trust deed, mortgage loans held for investment, including the percentage of those which are identified as non-performing or 30 – 89 days delinquent as of March 31, 2019:
(Dollars In Thousands)
 
Balance (1)
   
Non-Performing (1)
 
30 - 89 Days
Delinquent (1)
 
Interest rate reset in the next 12 months
 
$
55,616
     
4%
 
   
1%
 
Interest rate reset between 1 year and 5 years
   
     
—%
 
   
—%
 
Interest rate reset after 5 years
   
707
     
100%
 
   
—%
 
Total
 
$
56,323
     
5%
 
   
1%
 

(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 single-family, first trust deed, mortgage loans held for investment, at March 31, 2019:
   
Calendar Year of Origination
       
(Dollars In
Thousands)
 
2011 &
Prior
   

2012
   

2013
   

2014
   

2015
   

2016
   

2017
   

2018
   
YTD
2019
   

Total
 
Loan balance (in
  thousands)
 
$
93,005
   
$
1,937
   
$
1,681
   
$
5,127
   
$
8,812
   
$
28,554
   
$
67,035
   
$
81,516
   
$
14,985
   
$
302,652
 
Weighted-average
  LTV (1)
   
58%
 
   
53%
 
   
40%
 
   
62%
 
   
68%
 
   
63%
 
   
72%
 
   
70%
 
   
68%
 
   
65%
 
Weighted-average
  age (in years)
   
13.42
   
6.58
     
5.85
     
4.68
     
3.82
     
2.72
     
1.86
     
0.74
     
0.92
     
5.30
 
Weighted-average
  FICO (2)
   
730
     
757
     
758
     
754
     
746
     
752
     
739
     
743
     
769
     
741
 
Number of loans
   
347
     
10
     
18
     
16
     
13
     
56
     
104
     
140
     
26
     
730
 
                                                                                 
Geographic
  breakdown (%)
                                                                               
Inland Empire
   
37%
 
   
17%
 
   
56%
 
   
33%
 
   
18%
 
   
26%
 
   
33%
 
   
42%
 
   
9%
 
   
34%
 
Southern
  California (3)
   
51%
 
   
52%
 
   
25%
 
   
38%
 
   
57%
 
   
34%
 
   
45%
 
   
50%
 
   
29%
 
   
47%
 
Other California (4)
   
11%
 
   
31%
 
   
19%
 
   
29%
 
   
25%
 
   
40%
 
   
22%
 
   
8%
 
   
62%
 
   
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.

71
The following table summarizes the interest rate reset (repricing) schedule of the Corporation's single-family, first trust deed, mortgage loans held for investment, including the percentage of those which are identified as non-performing or 30 – 89 days delinquent as of March 31, 2019:
(Dollars In Thousands)
 
Balance (1)
   
Non-Performing (1)
 
30 - 89 Days
Delinquent (1)
 
Interest rate reset in the next 12 months
 
$
100,266
     
3%
 
   
1%
 
Interest rate reset between 1 year and 5 years
   
130,090
     
—%
 
   
—%
 
Interest rate reset after 5 years
   
72,296
     
3%
 
   
—%
 
Total
 
$
302,652
     
2%
 
   
—%
 

(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 multi-family loans held for investment, at March 31, 2019:
   
Calendar Year of Origination
       
(Dollars In Thousands)
 
2011 &
Prior
   

2012
   

2013
   

2014
   

2015
   

2016
   

2017
   

2018
   
YTD
2019
   

Total
 
Loan balance (in
  thousands)
 
$
16,057
   
$
9,816
   
$
25,044
   
$
49,349
   
$
68,866
   
$
110,780
   
$
72,030
   
$
76,332
   
$
21,538
   
$
449,812
 
Weighted-average LTV (1)
   
37%
 
   
48%
 
   
48%
 
   
49%
 
   
51%
 
   
47%
 
   
49%
 
   
45%
 
   
59%
 
   
48%
 
Weighted-average DCR (2)
   
1.75x
 
   
1.90x
 
   
1.83x
 
   
1.70x
 
   
1.67x
 
   
1.67x
 
   
1.67x
 
   
1.57x
 
   
1.47x
 
   
1.66x
 
Weighted-average age (in
  years)
   
13.02
     
6.54
     
5.63
     
4.74
     
3.70
     
2.75
     
1.81
     
0.83
     
0.07
     
3.12
 
Weighted-average FICO (3)
   
727
     
745
     
767
     
768
     
753
     
762
     
751
     
757
     
750
     
756
 
Number of loans
   
40
     
13
     
44
     
74
     
114
     
136
     
116
     
93
     
25
     
655
 
                                                                                 
Geographic breakdown
  (%)
                                                                               
Inland Empire
   
34%
 
   
—%
 
   
41%
 
   
16%
 
   
18%
 
   
11%
 
   
17%
 
   
12%
 
   
10%
 
   
16%
 
Southern California (4)
   
56%
 
   
78%
 
   
46%
 
   
50%
 
   
60%
 
   
61%
 
   
64%
 
   
68%
 
   
68%
 
   
61%
 
Other California (5)
   
8%
 
   
22%
 
   
13%
 
   
34%
 
   
22%
 
   
28%
 
   
19%
 
   
20%
 
   
22%
 
   
23%
 
Other States
   
2%
 
   
—%
 
   
—%
 
   
—%
 
   
—%
 
   
—%
 
   
—%
 
   
—%
 
   
—%
 
   
—%
 
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)
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.

72
The following table summarizes the interest rate reset or maturity schedule of the Corporation's multi-family loans held for investment, including the percentage of those which are identified as non-performing, 30 – 89 days delinquent or not fully amortizing as of March 31, 2019:
(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
 
$
132,835
     
—%
 
   
—%
 
   
7%
 
Interest rate reset or mature between 1 year and 5 years
   
302,422
     
—%
 
   
—%
 
   
1%
 
Interest rate reset or mature after 5 years
   
14,555
     
—%
 
   
—%
 
   
—%
 
Total
 
$
449,812
     
—%
 
   
—%
 
   
3%
 

(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 March 31, 2019:
   
Calendar Year of Origination
       
(Dollars In Thousands)
 
2011 &
Prior
   

2012
   

2013
   

2014
   

2015
   

2016
   

2017
   

2018
   
YTD
2019
   
Total (5)(6)
Loan balance (in
  thousands)
 
$
537
   
$
9,373
   
$
7,679
   
$
18,237
   
$
19,278
   
$
15,791
   
$
19,366
   
$
19,900
   
$
5,194
   
$
115,355
 
Weighted-average LTV (1)
   
36%
 
   
44%
 
   
48%
 
   
42%
 
   
39%
 
   
47%
 
   
42%
 
   
44%
 
   
42%
 
   
43%
 
Weighted-average DCR (2)
   
1.38x
 
   
1.98x
 
   
1.65x
 
   
1.96x
 
   
1.8x
 
   
1.57x
 
   
1.82x
 
   
1.61x
 
   
1.45x
 
   
1.75x
 
Weighted-average age (in
  years)
   
10.09
     
6.48
     
5.71
     
4.59
     
3.69
     
2.86
     
1.61
     
0.79
     
0.11
     
3.10
 
Weighted-average FICO (2)
   
711
     
742
     
767
     
753
     
757
     
758
     
773
     
754
     
738
     
757
 
Number of loans
   
4
     
7
     
12
     
22
     
25
     
22
     
23
     
29
     
6
     
150
 
                                                                                 
Geographic breakdown
  (%):
                                                                               
Inland Empire
   
69%
 
   
78%
 
   
27%
 
   
41%
 
   
31%
 
   
11%
 
   
26%
 
   
10%
 
   
—%
 
   
28%
 
Southern California (3)
   
31%
 
   
22%
 
   
45%
 
   
44%
 
   
32%
 
   
65%
 
   
52%
 
   
55%
 
   
81%
 
   
48%
 
Other California (4)
   
—%
 
   
—%
 
   
28%
 
   
15%
 
   
37%
 
   
24%
 
   
22%
 
   
35%
 
   
19%
 
   
24%
 
Other States
   
—%
 
   
—%
 
   
—%
 
   
—%
 
   
—%
 
   
—%
 
   
—%
 
   
—%
 
   
—%
 
   
—%
 
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.
(5)
Comprised of the following: $47.2 million in Mixed Use; $20.7 million in Office; $19.9 million in Retail; $8.6 million in Mobile Home Parks; $7.7 million in Warehouse; $4.3 million in Medical/Dental Office; $2.7 million in Mini-Storage; $1.7 million in Restaurant/Fast Food; $1.5 million in Light Industrial/Manufacturing and $1.1 million in Automotive – Non Gasoline.
(6)
Consisting of $108.9 million or 94.4 percent in investment properties and $6.5 million or 5.6 percent in owner occupied properties.

73
The following table summarizes the interest rate reset or maturity schedule of the Corporation's commercial real estate loans held for investment, including the percentage of those which are identified as non-performing, 30 – 89 days delinquent or not fully amortizing as of March 31, 2019:
(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
 
$
45,699
     
—%
 
   
—%
 
   
83%
 
Interest rate reset or mature between 1 year and 5 years
   
69,656
     
—%
 
   
—%
 
   
90%
 
Interest rate reset or mature after 5 years
   
     
—%
 
   
—%
 
   
—%
 
Total
 
$
115,355
     
—%
 
   
—%
 
   
87%
 

(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 March 31,
2019
   
At June 30,
2018
 
Loans on non-accrual status (excluding restructured loans):
           
Mortgage loans:
           
     Single-family
 
$
2,657
   
$
2,665
 
     Construction
   
745
     
 
     Total
   
3,402
     
2,665
 
                 
Accruing loans past due 90 days or more
   
     
 
                 
Restructured loans on non-accrual status:
               
Mortgage loans:
               
     Single-family
   
2,669
     
3,328
 
Commercial business loans
   
44
     
64
 
     Total
   
2,713
     
3,392
 
                 
Total non-performing loans
   
6,115
     
6,057
 
                 
Real estate owned, net
   
     
906
 
Total non-performing assets
 
$
6,115
   
$
6,963
 
                 
Non-performing loans as a percentage of loans held for investment, net
   of allowance for loan losses
   
0.69
%
   
0.67
%
                 
Non-performing loans as a percentage of total assets
   
0.55
%
   
0.52
%
                 
Non-performing assets as a percentage of total assets
   
0.55
%
   
0.59
%

74
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 March 31, 2019:
   
Calendar Year of Origination
       
(In Thousands)
 
2011 &
Prior
   
2012
   
2013
   
2014
   
2015
   
2016
   
2017
   
2018
   
YTD
2019
   
Total
 
Mortgage loans:
                                                           
Single-family
 
$
3,775
   
$
84
   
$
   
$
   
$
   
$
   
$
1,467
   
$
   
$
   
$
5,326
 
Construction
   
     
     
     
     
     
     
     
745
     
     
745
 
Commercial business
  loans
   
44
     
     
     
     
     
     
     
     
     
44
 
Total
 
$
3,819
   
$
84
   
$
   
$
   
$
   
$
   
$
1,467
   
$
745
   
$
   
$
6,115
 

The following table describes the non-performing loans, net of allowance for loan losses and fair value adjustments, by the geographic location as of March 31, 2019:
(In Thousands)
 
Inland Empire
   
Southern
California (1)
   
Other
California (2)
   
Other States
   
Total
 
Mortgage loans:
                             
Single-family
 
$
1,892
   
$
2,110
   
$
1,324
   
$
   
$
5,326
 
Construction
   
     
745
     
     
     
745
 
Commercial business loans
   
44
     
     
     
     
44
 
Total
 
$
1,936
   
$
2,855
   
$
1,324
   
$
   
$
6,115
 

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

 
75
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 March 31,
2019
   
At June 30,
2018
 
(Dollars In Thousands)
 
Balance
   
Count
   
Balance
   
Count
 
Special mention loans:
                       
Mortgage loans:
                       
     Single-family
 
$
3,347
     
12
   
$
2,584
     
8
 
     Multi-family
   
3,885
     
3
     
3,947
     
3
 
     Commercial real estate
   
     
     
940
     
1
 
          Total special mention loans
   
7,232
     
15
     
7,471
     
12
 
                                 
Substandard loans:
                               
Mortgage loans:
                               
     Single-family
   
6,751
     
23
     
7,391
     
24
 
     Construction
   
745
     
1
     
     
 
     Commercial business loans
   
44
     
1
     
64
     
1
 
          Total substandard loans
   
7,540
     
25
     
7,455
     
25
 
                                 
Total classified loans
   
14,772
     
40
     
14,926
     
37
 
                                 
Real estate owned:
                               
     Single-family
   
     
     
906
     
2
 
          Total real estate owned
   
     
     
906
     
2
 
                                 
Total classified assets
 
$
14,772
     
40
   
$
15,832
     
39
 


76
Loan Volume Activities

The following table is provided to disclose details related to the volume of loans originated, purchased and sold for the quarters and nine months indicated:
   
For the Quarters Ended
March 31,
   
For the Nine Months Ended
March 31,
 
(In Thousands)
 
2019
   
2018
   
2019
   
2018
 
Loans originated for sale:
                       
    Retail originations
 
$
72,353
   
$
129,816
   
$
287,399
   
$
526,904
 
    Wholesale originations
   
38,353
     
90,377
     
166,045
     
417,445
 
        Total loans originated for sale (1)
   
110,706
     
220,193
     
453,444
     
944,349
 
                                 
Loans sold:
                               
    Servicing released
   
(134,264
)
   
(220,532
)
   
(510,798
)
   
(945,715
)
    Servicing retained
   
(2,409
)
   
(5,326
)
   
(5,193
)
   
(22,574
)
        Total loans sold (2)
   
(136,673
)
   
(225,858
)
   
(515,991
)
   
(968,289
)
                                 
Loans originated for investment:
                               
    Mortgage loans:
                               
          Single-family
   
6,862
     
22,665
     
48,258
     
62,363
 
          Multi-family
   
9,523
     
18,612
     
27,678
     
40,279
 
          Commercial real estate
   
4,040
     
5,930
     
12,520
     
18,900
 
          Construction
   
1,970
     
2,050
     
5,313
     
4,459
 
    Consumer loans
   
     
     
     
3
 
        Total loans originated for investment  (3)
   
22,395
     
49,257
     
93,769
     
126,004
 
                                 
Loans purchased for investment:
                               
    Mortgage loans:
                               
          Single-family
   
8,426
     
     
8,426
     
 
          Multi-family
   
12,023
     
     
16,645
     
2,241
 
          Commercial real estate
   
1,157
     
     
1,157
     
868
 
Total loans purchased for investment (3)
   
21,606
     
     
26,228
     
3,109
 
                                 
Mortgage loan principal payments
   
(36,456
)
   
(43,163
)
   
(140,548
)
   
(143,914
)
Real estate acquired in settlement of loans
   
     
(959
)
   
     
(1,659
)
(Decrease) increase in other items, net (4)
   
(499
)
   
1,955
     
(1,831
)
   
2,923
 
                                 
Net (decrease) increase in loans held for investment and
  loans held for sale at fair value
 
$
(18,921
)
 
$
1,425
   
$
(84,929
)
 
$
(37,477
)

(1)
Includes PBM loans originated for sale during the quarters and nine months ended March 31, 2019 and 2018 totaling $110.7 million, $220.2 million, $453.4 million and $944.3 million, respectively.
(2)
Includes PBM loans sold during the quarters and nine months ended March 31, 2019 and 2018 totaling $136.7 million, $225.9 million, $516.0 million and $968.3 million, respectively.
(3)
Includes PBM loans originated and purchased for investment during the quarters and nine months ended March 31, 2019 and 2018 totaling $4.0 million, $20.6 million, $44.0 million and $58.4 million, respectively.
(4)
Includes net changes in undisbursed loan funds, deferred loan fees or costs, allowance for loan losses, fair value of loans held for investment, fair value of loans held for sale, advance payments of escrows and repurchases.

77
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.  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 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 nine months of fiscal 2019 and 2018, the Corporation originated and purchased $573.4 million and $1.07 billion of loans, respectively.  The total loans sold in the first nine months of fiscal 2019 and 2018 were $516.0 million and $968.3 million, respectively.  At March 31, 2019, the Corporation had loan origination commitments totaling $16.6 million, undisbursed lines of credit totaling $1.4 million and undisbursed construction loan funds totaling $6.1 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 nine months of fiscal 2019, the net decrease in deposits was $30.7 million or three percent, primarily due to non-renewing scheduled maturities in time deposits. The decrease in time deposits was consistent with the Corporation's operating strategy. Time deposits decreased $27.4 million, or 12 percent, to $210.2 million at March 31, 2019 from $237.6 million at June 30, 2018.  At March 31, 2019, time deposits with a principal amount of $250,000 or less and scheduled to mature in one year or less were $93.5 million and total time deposits with a principal amount of more than $250,000 and scheduled to mature in one year or less were $22.8 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 March 31, 2019, total cash and cash equivalents were $61.5 million, or five 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 March 31, 2019, total borrowings were $101.1 million and the financing availability at FHLB – San Francisco was limited to 35 percent of total assets; the remaining borrowing facility was $280.9 million and the remaining available collateral was $485.7 million. In addition, the Bank has secured an $80.5 million discount window facility at the Federal Reserve Bank of San Francisco, collateralized by investment securities with a fair market value of $85.6 million.  As of March 31, 2019, 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, 2019 which the Bank intends to renew upon maturity.  The Bank had no advances under its correspondent bank or discount window facility as of March 31, 2019.

78
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 March 31, 2019 increased to 22.6 percent from 14.9 percent for the quarter ended June 30, 2018.

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.

At March 31, 2019, the Bank exceeded all regulatory capital requirements.  The Bank was categorized "well-capitalized" at March 31, 2019 under the regulations of the OCC. As a bank holding company registered with the Federal Reserve, Provident Financial Holdings, Inc. is subject to the capital adequacy requirements of the Federal Reserve. For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis, and the Federal Reserve expects the holding company's subsidiary bank to be well capitalized under the prompt corrective action regulations. If Provident Financial Holdings, Inc. were subject to regulatory capital guidelines for bank holding companies with $3.0 billion or more in assets at March 31, 2019, Provident Financial Holdings, Inc. would have exceeded all regulatory capital requirements.  The regulatory capital ratios calculated for Provident Financial Holdings, Inc. at March 31, 2019 were 10.81% for Tier 1 leverage-based capital, 18.32% for Tier 1 risk-based capital, 19.42% for total risk-based capital, and 18.32% for common equity Tier 1 ("CET1") capital ratio.

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(1)
   
Minimum to Be
Well Capitalized
 
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
                                     
Provident Savings Bank, F.S.B.:
                                   
                                     
As of March 31, 2019
                                   
Tier 1 leverage capital (to adjusted average assets)
$
113,906
     
10.17
%
 
$
44,779
     
4.00
%
 
$
55,974
     
5.00
%
CET1 capital (to risk-weighted assets)
 
$
113,906
     
17.24
%
 
$
46,240
     
7.00
%
 
$
42,937
     
6.50
%
Tier 1 capital (to risk-weighted assets)
 
$
113,906
     
17.24
%
 
$
56,148
     
8.50
%
 
$
52,845
     
8.00
%
Total capital (to risk-weighted assets)
 
$
121,137
     
18.34
%
 
$
69,359
     
10.50
%
 
$
66,057
     
10.00
%
                                                 
As of June 30, 2018
                                               
Tier 1 leverage capital (to adjusted average assets)
$
116,369
     
9.96
%
 
$
46,716
     
4.00
%
 
$
58,394
     
5.00
%
CET1 capital (to risk-weighted assets)
 
$
116,369
     
16.81
%
 
$
44,125
     
6.38
%
 
$
44,990
     
6.50
%
Tier 1 capital (to risk-weighted assets)
 
$
116,369
     
16.81
%
 
$
54,507
     
7.88
%
 
$
55,372
     
8.00
%
Total capital (to risk-weighted assets)
 
$
123,911
     
17.90
%
 
$
68,350
     
9.88
%
 
$
69,215
     
10.00
%
(1)
The dollar amounts and ratios include the capital conservation buffer of 2.50% and 1.875% of risk-weighted assets at March 31, 2019 and June 30, 2018, respectively, except the Tier 1 leverage capital dollar amounts and ratios.
 
In addition to the minimum CET1, Tier 1 and total capital ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets 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. As of March 31, 2019, the Bank's capital conservation buffer was 10.34% as filed in the Call Report with the OCC.
 
79
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 nine months of fiscal 2019, the Bank paid a cash dividend of $7.5 million to the Corporation; while the Corporation paid $3.1 million of cash dividends to its shareholders.


Supplemental Information
   
At
March 31,
2019
   
At
June 30,
2018
   
At
March 31,
2018
 
                   
Loans serviced for others (in thousands)
 
$
123,049
   
$
128,409
   
$
128,060
 
                         
Book value per share
 
$
16.17
   
$
16.23
   
$
16.16
 


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 -200, -100, +100, +200 and +300 basis points ("bp") with no effect given to steps that management might take to counter the effect of the interest rate movement. The current federal funds rate is 2.50 percent making an immediate change of -300 basis points improbable.

80

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 March 31, 2019 (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)
 
 
+300bp
 
$
221,787
 
$
98,304
 
$
1,210,431
   
18.32%
   
+740bp
 
 
+200bp
 
$
192,959
 
$
69,476
 
$
1,187,516
   
16.25%
   
+533bp
 
 
+100bp
 
$
159,617
 
$
36,134
 
$
1,160,287
   
13.76%
   
+284bp
 
 
0bp
 
$
123,483
 
$
 
$
1,130,483
   
10.92%
   
0bp
 
 
-100bp
 
$
113,761
 
$
(9,722
 
$
1,121,186
   
10.15%
   
-77bp
 
 
-200bp
 
$
127,904
 
$
4,421
 
$
1,135,758
   
11.26%
   
+34bp
 

(1)
Represents the increase (decrease) of the NPV at the indicated interest rate change in comparison to the NPV at March 31, 2019 ("base case").
(2)
Derived from the NPV divided by the portfolio value of total assets.
(3)
Derived from 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 March 31, 2019 and June 30, 2018.
 
At March 31, 2019
At June 30, 2018
 
(-100 bp rate shock)
(-100 bp rate shock)
Pre-Shock NPV Ratio: NPV as a % of PV Assets
10.92%
10.24%
Post-Shock NPV Ratio: NPV as a % of PV Assets
10.15%
9.62%
Sensitivity Measure: Change in NPV Ratio
-77 bp
-62 bp

The pre-shock NPV ratio increased 68 basis points to 10.92 percent at March 31, 2019 from 10.24 percent at June 30, 2018 and the post-shock NPV ratio increased 53 basis points to 10.15 percent at March 31, 2019 from 9.62 percent at June 30, 2018.  The increase of the NPV ratios was primarily attributable to net income in the first nine months of fiscal 2019 and a higher net valuation of total assets in comparison to total liabilities, partly offset by a $7.5 million cash dividend distribution from the Bank to Provident Financial Holdings, Inc. in September 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.

81
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 contractual repricing or scheduled maturity.  For transaction accounts (checking, money market and savings deposits) that have no contractual maturity, the table presents estimated principal cash flows and, as applicable, the Corporation's historical experience, management's judgment and statistical analysis concerning their most likely withdrawal behaviors.

The following table represents the interest rate gap analysis of the Corporation's assets and liabilities as of March 31, 2019:
   
Term to Contractual Repricing, Estimated Repricing, or Contractual
Maturity (1)
 
   
As of March 31, 2019
 
(Dollars In Thousands)
 
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
 
       
Repricing Assets:
                             
Cash and cash equivalents
 
$
54,980
   
$
   
$
   
$
6,478
   
$
61,458
 
Investment securities
   
34,768
     
200
     
     
73,836
     
108,804
 
Loans held for investment
   
272,770
     
233,125
     
284,781
     
92,878
     
883,554
 
Loans held for sale
   
30,500
     
     
     
     
30,500
 
FHLB - San Francisco stock
   
8,199
     
     
     
     
8,199
 
Other assets
   
3,387
     
     
     
23,493
     
26,880
 
Total assets
   
404,604
     
233,325
     
284,781
     
196,685
     
1,119,395
 
                                         
Repricing Liabilities and Equity:
                                       
Checking deposits - non-interest bearing
   
     
     
     
90,875
     
90,875
 
Checking deposits - interest bearing
   
40,447
     
80,894
     
80,894
     
67,413
     
269,648
 
Savings deposits
   
54,394
     
108,788
     
108,789
     
     
271,971
 
Money market deposits
   
17,115
     
17,114
     
     
     
34,229
 
Time deposits
   
116,331
     
69,668
     
23,446
     
716
     
210,161
 
Borrowings
   
     
41,121
     
40,000
     
20,000
     
101,121
 
Other liabilities
   
335
     
     
     
19,846
     
20,181
 
Stockholders' equity
   
     
     
     
121,209
     
121,209
 
Total liabilities and stockholders' equity
   
228,622
     
317,585
     
253,129
     
320,059
     
1,119,395
 
                                         
Repricing gap positive (negative)
 
$
175,982
   
$
(84,260
)
 
$
31,652
   
$
(123,374
)
 
$
 
Cumulative repricing gap:
                                       
Dollar amount
 
$
175,982
   
$
91,722
   
$
123,374
   
$
   
$
 
Percent of total assets
   
16
%
   
8
%
   
11
%
   
%
   
%

(1) Cash and cash equivalents are presented as estimated repricing; 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 estimated repricing; FHLB - San Francisco stock is presented as contractual repricing; while time deposits (without consideration for early withdrawals) and borrowings are presented as contractual maturities.

The static gap analysis shows a positive position in the "Cumulative repricing gap - dollar amount" category, indicating more assets are sensitive to repricing than liabilities. Management views non-interest bearing deposits to be the least sensitive to
 
82
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 estimated repricing 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 and deposit fluctuations.

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 300, 200 and 100 and minus 100 and 200 basis points.  

The following table describes the results of the analysis at March 31, 2019 and June 30, 2018.
At March 31, 2019
 
At June 30, 2018
Basis Point (bp)
Change in Rates
Change in
Net Interest Income
 
Basis Point (bp)
Change in Rates
Change in
Net Interest Income
+300 bp
6.50%
 
+300 bp
6.83%
+200 bp
6.04%
 
+200 bp
5.73%
+100 bp
5.00%
 
+100 bp
4.53%
 -100 bp
(5.86)%
 
-100 bp
(3.98)%
 -200 bp
(12.21)%
 
-200 bp
(10.61)%

At March 31, 2019 and June 30, 2018, the Corporation was asset sensitive as its interest-earning assets at those dates are expected to reprice more quickly than its interest-bearing liabilities during the subsequent 12-month period.  Therefore, in a rising interest rate environment, the model projects an increase in net interest income over the subsequent 12-month period.  In a falling interest rate environment, the results project a decrease in net interest income over the subsequent 12-month period.

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
 
83
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 March 31, 2019 are effective, at the reasonable assurance level, in ensuring that the information required to be disclosed by the Corporation in the reports it files or submits under the Act is (i) accumulated and communicated to the Corporation's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

b) There have been no changes in the Corporation's internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended March 31, 2019, 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.


84

PART II – OTHER INFORMATION

Item 1.  Legal Proceedings.

There have been no material changes in the legal proceedings previously disclosed in Part I, Item 3 of the Corporation's Annual Report on Form 10-K for the year ended June 30, 2018, except as follows.

On November 13, 2018, the presiding Court approved the motion for final approval of the settlement agreement in the two class and collective action lawsuits filed by Gina McKeen-Chaplin and Neal, respectively, against the Bank.  The settlement funds have been distributed to the plaintiffs and plaintiff's counsel consistent with the settlement agreements.  On April 8, 2019, the presiding Court signed an order closing and dismissing the cases.

On December 20, 2018, counsel in the lawsuit known as Cannon vs. the Bank filed a Motion for Preliminary Approval of the Settlement in the California Superior Court for the County of San Bernardino. On April 12, 2019, this Court granted preliminary approval of the settlement and set a tentative date for a hearing on final approval for July 24, 2019, which presumes the notice and claim process will be completed by then.


Item 1A.  Risk Factors.

Except as set forth below, 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, 2018.

The discontinuation of our mortgage banking segment could adversely affect our results of operations.

On February 4, 2019, we announced the discontinuation of our mortgage banking segment conducted through Provident Bank Mortgage, a division of Provident Savings Bank, F.S.B. by June 30, 2019. As a result, we expect to incur one-time costs of approximately $3.6 million to $4.0 million during the remainder of fiscal 2019. It may take longer than we expect to complete the winding down of this business and we may incur costs that exceed our estimated costs. Although we anticipate the elimination of quarterly pre-tax losses from the mortgage banking segment and further anticipate increases in our pre-tax income of $1.2 million per quarter as a result of the discontinuation of the mortgage banking business, no assurance can be given as to when or whether we will realize these benefits.


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 third quarter of fiscal 2019.
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)
January 1 – 31, 2019
   
   
$
     
     
373,000
 
February 1 – 28, 2019
   
11,941
   
$
18.69
     
11,941
     
361,059
 
March 1 – 31, 2019
   
11,807
   
$
20.05
     
11,807
     
349,252
 
Total
   
23,748
   
$
19.36
     
23,748
     
349,252
 

(1)
Represents the remaining shares available for future purchases under the April 2018 stock repurchase plan.

85
During the quarter and nine months ended March 31, 2019, the Corporation purchased 23,748 shares of the Corporation's common stock at an average cost of $19.36 per share. As of March 31, 2019, a total of 23,748 shares or six percent of the shares authorized in the April 2018 stock repurchase plan have been purchased at an average cost of $19.36 per share, leaving 349,252 shares available for future purchases. During the quarter ended March 31, 2019, the Corporation issued 11,250 shares of common stock consistent the exercise of certain stock options and 3,000 shares of restricted common stock vested. The Company did not purchase any shares from recipients to fund their withholding tax obligations in the third quarter of fiscal 2019. For the nine months ended March 31, 2019, the Corporation issued 31,250 shares of common stock consistent with the exercise of certain stock options and 89,500 shares of restricted common stock vested. The Company purchased 21,071 shares at an average price of $18.28 per share from recipients to fund their withholding tax obligations in the first nine months of fiscal 2019. During the quarter and nine months ended March 31, 2019, the Corporation did not sell any securities that were not registered under the Securities Act of 1933.


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:
   
   
   
   
 
86
   
   
   
   
   
   
   
   
   
   
   
   
   
   
 
87
   
   
101
The following materials from the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, 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.
   

88
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: May 9, 2019
/s/ Craig G. Blunden
 
Craig G. Blunden
 
Chairman and Chief Executive Officer
(Principal Executive Officer)
   
   
   
Date: May 9, 2019
/s/ Donavon P. Ternes
 
Donavon P. Ternes
 
President, Chief Operating Officer and
Chief Financial Officer
(Principal Financial and Accounting Officer)

89
Exhibit Index

   
   
   
   
101
The following materials from the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, 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.