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PROVIDENT FINANCIAL HOLDINGS INC - Quarter Report: 2020 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, 2020
 
 

[   ]
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)

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

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

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 April 30, 2020 there were 7,436,315 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, 2020 and June 30, 2019
1
 
Condensed Consolidated Statements of Operations
 
   
for the Quarter and Nine Months Ended March 31, 2020 and 2019
2
 
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
   
for the Quarter and Nine Months Ended March 31, 2020 and 2019
3
 
Condensed Consolidated Statements of Stockholders’ Equity
 
   
for the Quarter and Nine Months Ended March 31, 2020 and 2019
4
 
Condensed Consolidated Statements of Cash Flows
 
   
for the Nine Months Ended March 31, 2020 and 2019
6
 
Notes to Unaudited Interim Condensed Consolidated Financial Statements
7
       
ITEM 2  -
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
 
       
 
General
42
 
Safe-Harbor Statement
43
 
Critical Accounting Policies
44
 
Executive Summary and Operating Strategy
45
 
Off-Balance Sheet Financing Arrangements and Contractual Obligations
47
 
Comparison of Financial Condition at March 31, 2020 and June 30, 2019
48
 
Comparison of Operating Results
for the Quarter and Nine Months Ended March 31, 2020 and 2019
49
 
Asset Quality
61
 
Loan Volume Activities
64
 
Liquidity and Capital Resources
64
 
Supplemental Information
66
       
ITEM 3  -
Quantitative and Qualitative Disclosures about Market Risk
67
       
ITEM 4  -
Controls and Procedures
71
       
PART II  -
OTHER INFORMATION
 
       
ITEM 1  -
Legal Proceedings
71
ITEM 1A -
Risk Factors
72
ITEM 2  -
Unregistered Sales of Equity Securities and Use of Proceeds
73
ITEM 3  -
Defaults Upon Senior Securities
73
ITEM 4  -
Mine Safety Disclosures
73
ITEM 5  -
Other Information
74
ITEM 6  -
Exhibits
74
       
SIGNATURES
75
.



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

 
March 31,
 2020
June 30,
 2019
Assets
   
    Cash and cash equivalents
$
84,250
 
$
70,632
 
    Investment securities – held to maturity, at cost
69,482
 
94,090
 
    Investment securities – available for sale, at fair value
4,828
 
5,969
 
    Loans held for investment, net of allowance for loan losses of
    $7,810 and $7,076, respectively; includes $3,835 and $5,094 at fair value, respectively
914,307
 
879,925
 
    Accrued interest receivable
3,154
 
3,424
 
    Federal Home Loan Bank (“FHLB”) – San Francisco stock
8,199
 
8,199
 
    Premises and equipment, net
10,606
 
8,226
 
    Prepaid expenses and other assets
12,741
 
14,385
 
        Total assets
$
1,107,567
 
$
 1,084,850
 
     
Liabilities and Stockholders’ Equity
   
     
Liabilities:
   
    Non interest-bearing deposits
$
86,585
 
$
90,184
 
    Interest-bearing deposits
749,246
 
751,087
 
        Total deposits
835,831
 
841,271
 
     
    Borrowings
131,070
 
101,107
 
    Accounts payable, accrued interest and other liabilities
17,508
 
21,831
 
        Total liabilities
984,409
 
964,209
 
     
Commitments and Contingencies  (Notes 6 and 10)
   
     
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;
    18,097,615 and 18,081,365 shares issued; 7,436,315 and
    7,486,106 shares outstanding, respectively)
181
 
181
 
    Additional paid-in capital
95,355
 
94,351
 
    Retained earnings
193,802
 
190,839
 
    Treasury stock at cost (10,661,300 and 10,595,259 shares, respectively)
(166,247
)
(164,891
)
    Accumulated other comprehensive income, net of tax
67
 
161
 
     
        Total stockholders’ equity
123,158
 
120,641
 
     
        Total liabilities and stockholders’ equity
$
1,107,567
 
$
1,084,850
 
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,
 
   
2020
   
2019
   
2020
   
2019
 
Interest income:
                       
    Loans receivable, net
 
$
 9,622    
$
 10,011    
$
 30,017    
$
30,516
 
    Investment securities
   
478
     
592
     
1,659
     
1,381
 
    FHLB – San Francisco stock
   
144
     
144
     
432
     
565
 
    Interest-earning deposits
   
186
     
386
     
621
     
1,111
 
    Total interest income
   
10,430
     
11,133
     
32,729
     
33,573
 
                                 
Interest expense:
                               
    Checking and money market deposits
   
106
     
102
     
333
     
327
 
    Savings deposits
   
131
     
139
     
396
     
437
 
    Time deposits
   
509
     
600
     
1,571
     
1,851
 
    Borrowings
   
794
     
680
     
2,318
     
2,158
 
    Total interest expense
   
1,540
     
1,521
     
4,618
     
4,773
 
                                 
Net interest income
   
8,890
     
9,612
     
28,111
     
28,800
 
Provision (recovery) for loan losses
   
874
     
4
     
671
     
(450
)
Net interest income, after  provision (recovery) for loan losses
   
8,016
     
9,608
     
27,440
     
29,250
 
                                 
Non-interest income:
                               
    Loan servicing and other fees
   
131
     
262
     
631
     
863
 
    Gain (loss) on sale of loans, net
   
14
     
1,719
     
(115
)
   
7,114
 
    Deposit account fees
   
423
     
471
     
1,321
     
1,485
 
    Gain (loss) on sale and operations of real estate owned acquired in
       the settlement of loans, net
   
     
2
     
     
(4
)
    Card and processing fees
   
360
     
373
     
1,121
     
1,163
 
    Other
   
173
     
225
     
557
     
575
 
    Total non-interest income
   
1,101
     
3,052
     
3,515
     
11,196
 
                                 
Non-interest expense:
                               
    Salaries and employee benefits
   
4,966
     
9,292
     
14,950
     
24,753
 
    Premises and occupancy
   
845
     
1,286
     
2,603
     
3,905
 
    Equipment
   
314
     
417
     
855
     
1,333
 
    Professional expenses
   
351
     
513
     
1,090
     
1,371
 
    Sales and marketing expenses
   
177
     
246
     
506
     
668
 
    Deposit insurance premiums and regulatory assessments
   
54
     
124
     
97
     
461
 
    Other
   
798
     
1,122
     
2,196
     
3,088
 
    Total non-interest expense
   
7,505
     
13,000
     
22,297
     
35,579
 
                                 
Income (loss) before income taxes
   
1,612
     
(340
)
   
8,658
     
4,867
 
Provision (benefit) for income taxes
   
467
     
(189
)
   
2,553
     
1,237
 
    Net income (loss)
 
$
1,145
   
$
(151
)
 
$
6,105
   
$
3,630
 
                                 
Basic earnings (loss) per share
 
$
0.15
   
$
(0.02
)
 
$
0.82
   
$
0.49
 
Diluted earnings (loss) per share
 
$
0.15
   
$
(0.02
)
 
$
0.80
   
$
0.48
 
Cash dividends per share
 
$
0.14
   
$
0.14
   
$
0.42
   
$
0.42
 
.
The accompanying notes are an integral part of these condensed consolidated financial statements.
2


PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
In Thousands

   
For the Quarter Ended
March 31,
   
For the Nine Months Ended
March 31,
 
   
2020
   
2019
   
2020
   
2019
 
Net income (loss)
 
$
1,145
   
$
(151
)
 
$
6,105
   
$
3,630
 
                                 
Change in unrealized holding loss on securities available for sale
   
(94
)
   
(9
)
   
(133
)
   
(67
)
Reclassification adjustment for net loss on securities available
  for sale included in net loss
   
     
     
     
 
Other comprehensive loss, before income tax benefit
   
(94
)
   
(9
)
   
(133
)
   
(67
)
                                 
Income tax benefit
   
(28
)
   
(3
)
   
(39
)
   
(20
)
Other comprehensive loss
   
(66
)
   
(6
)
   
(94
)
   
(47
)
                                 
Total comprehensive income (loss)
 
$
1,079
   
$
(157
)
 
$
6,011
   
$
3,583
 









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 Quarter Ended March 31, 2020 and 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, 2019
   
7,483,071
   
$
181
   
$
95,118
   
$
193,704
   
$
(165,360
)
 
$
133
   
$
123,776
 
                                                         
Net income
                           
1,145
                     
1,145
 
Other comprehensive loss
                                           
(66
)
   
(66
)
Purchase of treasury stock
   
(46,756
)
                           
(887
)
           
(887
)
Amortization of restricted stock
               
217
                             
217
 
Stock options expense
                   
20
                             
20
 
Cash dividends (1)
                           
(1,047
)
                   
(1,047
)
                                                         
Balance at March 31, 2020
   
7,436,315
   
$
181
   
$
95,355
   
$
193,802
   
$
(166,247
)
 
$
67
   
$
123,158
 


(1)
Cash dividends of $0.14 per share were paid in the quarter ended March 31, 2020.

   
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.



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

4

For the Nine Months Ended March 31, 2020 and 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, 2019
   
7,486,106
   
$
181
   
$
94,351
   
$
190,839
   
$
(164,891
)
 
$
161
   
$
120,641
 
                                                         
Net income
                           
6,105
                     
6,105
 
Other comprehensive loss
                                           
(94
)
   
(94
)
Purchase of treasury stock
   
(66,041
)
                           
(1,284
)
           
(1,284
)
Exercise of stock options
   
16,250
             
215
                             
215
 
Forfeiture of restricted stock
                   
72
             
72
             
 
Amortization of restricted
   stock
                   
656
                             
656
 
Stock options expense
                   
61
                             
61
 
Cash dividends (1)
                           
(3,142
)
                   
(3,142
)
                                                         
Balance at March 31, 2020
   
7,436,315
   
$
181
   
$
95,355
   
$
193,802
   
$
(166,247
)
 
$
67
   
$
123,158
 
 (1)   Cash dividends of $0.42 per share were paid in the nine months ended March 31, 2020.


   
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 purchase 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.





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,
 
   
2020
   
2019
 
Cash flows from operating activities:
           
   Net income
 
$
6,105
   
$
3,630
 
   Adjustments to reconcile net income to net cash provided by operating activities:
               
      Depreciation and amortization
   
2,347
     
2,045
 
      Provision (recovery) for loan losses
   
671
     
(450
)
      (Gain) loss on sale of loans, net
   
115
     
(7,114
)
      Stock-based compensation
   
717
     
767
 
      Provision for deferred income taxes
   
881
     
553
 
   Decrease in accounts payable, accrued interest and other liabilities
   
(4,406
)
   
(320
)
   (Increase) decrease in prepaid expenses and other assets
   
(2,524
)
   
437
 
   Loans originated for sale
   
     
(453,444
)
   Proceeds from sale of loans
   
     
526,090
 
          Net cash provided by operating activities
   
3,906
     
72,194
 
                 
Cash flows from investing activities:
               
   (Increase) decrease in loans held for investment, net
   
(35,676
)
   
19,230
 
   Maturity of investment securities held to maturity
   
     
800
 
   Principal payments from investment securities held to maturity
   
24,283
     
24,093
 
   Principal payments from investment securities available for sale
   
1,010
     
1,140
 
   Purchase of investment securities held to maturity
   
     
(40,282
)
   Proceeds from sale of real estate owned
   
     
915
 
   Purchase of premises and equipment
   
(185
)
   
(151
)
         Net cash (used for) provided by investing activities
   
(10,568
)
   
5,745
 
                 
Cash flows from financing activities:
               
   Decrease in deposits, net
   
(5,440
)
   
(30,714
)
   Repayments of short-term borrowings, net
   
     
(15,000
)
   Repayments of long-term borrowings
   
(44
)
   
(10,042
)
   Proceeds from long-term borrowings
   
30,007
     
 
   Exercise of stock options
   
215
     
390
 
   Withholding taxes on stock based compensation
   
(32
)
   
(428
)
   Cash dividends
   
(3,142
)
   
(3,143
)
   Treasury stock purchases
   
(1,284
)
   
(845
)
         Net cash provided by (used for) financing activities
   
20,280
     
(59,782
)
                 
Net increase in cash and cash equivalents
   
13,618
     
18,157
 
Cash and cash equivalents at beginning of period
   
70,632
     
43,301
 
Cash and cash equivalents at end of period
 
$
84,250
   
$
61,458
 
Supplemental information:
               
   Cash paid for interest
 
$
4,625
   
$
4,796
 
   Cash paid for income taxes
 
$
775
   
$
1,555
 
   Transfer of loans held for sale to held for investment
 
$
1,085
   
$
1,360
 


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, 2020

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, 2019 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, 2019.  The results of operations for the quarter ended March 31, 2020 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2020.


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, 2019, other than:

ASU 2016-13:
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and subsequent amendments to the initial guidance in November 2018, ASU No. 2018-19, April 2019, ASU 2019-04, May 2019, ASU 2019-05, November 2019, ASU 2019-11, February 2020, ASU 2020-02 and March 2020, ASU 2020-03, all of which clarifies codification and corrects unintended application of the guidance. In November 2019, the FASB also issued ASU 2019-10, “Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates” extending the adoption date for certain registrants, including the Corporation. These ASUs will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Corporation is evaluating its current expected loss methodology of its loan and investment portfolios to identify the necessary modifications in accordance with these standards and expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. A valuation adjustment to its allowance for loan losses or investment portfolio that is identified in this process will be reflected as a one-time adjustment in equity rather than earnings upon adoption. The Corporation is in the process of compiling historical data that will be used to calculate expected credit losses on its loan portfolio to ensure the Corporation is fully compliant with these ASUs at the adoption date and is evaluating the potential impact adoption that these ASUs will have on the Corporation’s Consolidated Financial Statements.

ASU 2018-11
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," and a subsequent amendment to the initial guidance in February 2020, ASU 2020-02. This ASU introduces a lessee model that brings most leases onto the balance sheet and aligns many of the underlying principles of the new lessor model with those in the new revenue recognition standard, Accounting Standards Codification (“ASC”) 606, Revenue From Contracts With Customers. The new leases standard represents a

7

wholesale change to lease accounting and did not result in significant implementation challenges during the transition period. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The effective date of this ASU for annual periods is beginning after December 15, 2018 (i.e., calendar periods beginning on January 1, 2019) and interim periods therein. 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. The Corporation adopted the provisions of ASC 842 effective July 1, 2019 utilizing the transition method allowed under ASU 2018-11 and will not restate comparative periods as well as electing to not separate non-lease components from lease components. The Corporation elected the package of practical expedients permitted under ASC 842's transition guidance, which allows the Corporation to carryforward its historical lease classifications and its assessment as to whether a contract is or contains a lease. The Corporation also elected to not recognize lease assets and lease liabilities for leases with an initial term of 12 months or less. The adoption of ASC 842 did not have a material impact on its consolidated financial statements. See Note 10 for additional discussion.

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. This guidance will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The guidance only affects disclosures in the notes to the consolidated financial statements and will not otherwise affect the Corporation’s Consolidated Financial Statements.

ASU 2020-04:
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of reference Rate Reform on Financial Reporting. This ASU applies to contracts, hedging relationships and other transactions that reference LIBOR or other rate references expected to be discontinued because of reference rate reform. The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Corporation is in the process of compiling data on the impact of reference rate reform and has not determined the impact of the adoption of this ASU on its consolidated financial statements.




8

Note 3: Earnings Per Share

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

As of March 31, 2020 and 2019, there were outstanding options to purchase 554,500 shares and 497,750 shares of the Corporation’s common stock, respectively. Of those shares, as of March 31, 2020 and 2019, there were 135,000 shares and 497,750 shares, respectively, which were excluded from the diluted EPS computation as their effect was anti-dilutive. As of March 31, 2020 and 2019, there were outstanding restricted stock awards of 225,500 shares and 9,000 shares, respectively. The outstanding restricted stock had a dilutive effect for the quarter and nine months ended March 31, 2020. There was no dilutive effect for the comparable quarter last year; however, there was a dilutive effect in the first nine month of fiscal 2019.

The following table provides the basic and diluted EPS computations for the quarter and nine months ended March 31, 2020 and 2019, respectively.
   
For the Quarter Ended
March 31,
   
For the Nine Months Ended
March 31,
 
(In Thousands, Except Earnings Per Share)
 
2020
   
2019
   
2020
   
2019
 
Numerator:
                       
    Net income (loss) – numerator for basic earnings per share
      and diluted earnings per share - available to common
      stockholders
 
$
1,145
   
$
(151
)
 
$
6,105
   
$
3,630
 
                                 
Denominator:
                               
    Denominator for basic earnings per share:
                               
      Weighted-average shares
   
7,469
     
7,507
     
7,478
     
7,481
 
                                 
      Effect of dilutive shares:
                               
          Stock options
   
71
     
     
87
     
60
 
          Restricted stock
   
50
     
     
41
     
14
 
                                 
    Denominator for diluted earnings per share:
                               
      Adjusted weighted-average shares and assumed
         conversions
   
7,590
     
7,507
     
7,606
     
7,555
 
                                 
Basic earnings (loss) per share
 
$
0.15
   
$
(0.02
)
 
$
0.82
   
$
0.49
 
Diluted earnings (loss) per share
 
$
0.15
   
$
(0.02
)
 
$
0.80
   
$
0.48
 




9

Note 4: Investment Securities

The amortized cost and estimated fair value of investment securities as of March 31, 2020 and June 30, 2019 were as follows:
March 31, 2020
 
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)
 
$
66,599
   
$
2,016
   
$
(88
)
 
$
68,527
   
$
66,599
 
   U.S. SBA securities (2)
   
2,083
     
     
(11
)
   
2,072
     
2,083
 
   Certificate of deposits
   
800
     
     
     
800
     
800
 
Total investment securities - held to maturity
 
$
69,482
   
$
2,016
   
$
(99
)
 
$
71,399
   
$
69,482
 
                                         
Available for sale:
                                       
   U.S. government agency MBS
 
$
2,913
   
$
88
   
$
   
$
3,001
   
$
3,001
 
   U.S. government sponsored enterprise MBS
   
1,614
     
16
     
     
1,630
     
1,630
 
   Private issue CMO (3)
   
219
     
     
(22
)
   
197
     
197
 
Total investment securities - available for sale
 
$
4,746
   
$
104
   
$
(22
)
 
$
4,828
   
$
4,828
 
Total investment securities
 
$
74,228
   
$
2,120
   
$
(121
)
 
$
76,227
   
$
74,310
 
(1)
Mortgage-Backed Securities (“MBS”).
(2)
Small Business Administration (“SBA”).
(3)
Collateralized Mortgage Obligations (“CMO”).

June 30, 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
 
$
90,394
   
$
1,289
   
$
(14
)
 
$
91,669
   
$
90,394
 
   U.S. SBA securities
   
2,896
     
     
(6
)
   
2,890
     
2,896
 
   Certificate of deposits
   
800
     
     
     
800
     
800
 
Total investment securities - held to maturity
 
$
94,090
   
$
1,289
   
$
(20
)
 
$
95,359
   
$
94,090
 
                                         
Available for sale
                                       
   U.S. government agency MBS
 
$
3,498
   
$
116
   
$
(1
)
 
$
3,613
   
$
3,613
 
   U.S. government sponsored enterprise MBS
   
1,998
     
89
     
     
2,087
     
2,087
 
   Private issue CMO
   
261
     
8
     
     
269
     
269
 
Total investment securities - available for sale
 
$
5,757
   
$
213
   
$
(1
)
 
$
5,969
   
$
5,969
 
Total investment securities
 
$
99,847
   
$
1,502
   
$
(21
)
 
$
101,328
   
$
100,059
 

In the third quarter of fiscal 2020 and 2019, the Corporation received MBS principal payments of $7.9 million and $8.6 million, respectively, and there were no sales of investment securities during these periods. The Corporation did not purchase any investment securities in the third quarter of fiscal 2020, as compared to the purchase of $26.2 million of U.S. government sponsored enterprise MBS to be held to maturity in the same period of fiscal 2019.

For the first nine months of fiscal 2020 and 2019, the Corporation received MBS principal payments of $25.3 million and $25.2 million, respectively, and there were no sales of investment securities during these periods. The Corporation did not purchase

10

any investment securities in the first nine months of fiscal 2020, as compared to the purchase of $39.7 million of U.S. government sponsored enterprise MBS to be held to maturity in the same period of fiscal 2019.

The Corporation held investments with an unrealized loss position of $121,000 at March 31, 2020 and $21,000 at June 30, 2019.
As of March 31, 2020
 
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
 
$
12,057
   
$
88
   
$
   
$
   
$
12,057
   
$
88
 
   U.S. SBA securities
   
     
     
2,072
     
11
     
2,072
     
11
 
Total investment securities – held to maturity
 
$
12,057
   
$
88
   
$
2,072
   
$
11
   
$
14,129
   
$
99
 
                                                 
Available for sale
                                               
Private issue CMO
  $
 197     $
 22     $
    $
 —     $
 197     $
 22  
Total investment securities – available for sale
  $
 197     $  22     $
 —     $
 —     $
 197     $
 22  
Total investment securities
  $
 12,254     $
 110     $
 2,072     $
 11     $
 14,326     $
 121  


As of June 30, 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
 
$
6,507
   
$
8
   
$
1,657
   
$
6
   
$
8,164
   
$
14
 
U.S. SBA securities
   
     
     
2,883
     
6
     
2,883
     
6
 
Total investment securities – held to maturity
 
$
6,507
   
$
8
   
$
4,540
   
$
12
   
$
11,047
   
$
20
 
                                                 
Available for sale
 
                                               
U.S. government agency MBS
 
$
289
   
$
1
   
$
   
$
   
$
289
   
$
1
 
Total investment securities – available for sale
 
$
289
   
$
1
   
$
   
$
   
$
289
   
$
1
 
Total investment securities
 
$
6,796
   
$
9
   
$
4,540
   
$
12
   
$
11,336
   
$
21
 

The Corporation evaluates individual investment securities quarterly for other-than-temporary declines in market value. At March 31, 2020, $11,000 of the $121,000 unrealized holding losses were 12 months or more; while at June 30, 2019, $12,000 of the $21,000 unrealized holding losses were 12 months or more. The Corporation does not believe that there were any other-than-temporary impairments on the investment securities at March 31, 2020 and 2019; therefore, no impairment losses were recorded for the quarter ended March 31, 2020 and 2019.

11

Contractual maturities of investment securities as of March 31, 2020 and June 30, 2019 were as follows:
   
March 31, 2020
   
June 30, 2019
 
(In Thousands)
 
Amortized
Cost
   
Estimated
Fair
Value
   
Amortized
Cost
   
Estimated
Fair
Value
 
                         
Held to maturity:
                       
Due in one year or less
 
$
800
   
$
800
   
$
400
   
$
400
 
Due after one through five years
   
22,193
     
22,942
     
32,584
     
32,728
 
Due after five through ten years
   
28,121
     
29,378
     
35,306
     
36,090
 
Due after ten years
   
18,368
     
18,279
     
25,800
     
26,141
 
Total investment securities - held to maturity
 
$
69,482
   
$
71,399
   
$
94,090
   
$
95,359
 
                                 
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
   
4,746
     
4,828
     
5,757
     
5,969
 
Total investment securities - available for sale
 
$
4,746
   
$
4,828
   
$
5,757
   
$
5,969
 
Total investment securities
 
$
74,228
   
$
76,227
   
$
99,847
   
$
101,328
 

Note 5: Loans Held for Investment

Loans held for investment, net of fair value adjustments, consisted of the following:
(In Thousands)
 
March 31,
2020
   
June 30,
2019
 
Mortgage loans:
           
    Single-family
 
$
326,686
   
$
324,952
 
    Multi-family
   
475,941
     
439,041
 
    Commercial real estate
   
105,691
     
111,928
 
    Construction (1)
   
6,346
     
4,638
 
    Other
   
     
167
 
Commercial business loans (2)
   
502
     
478
 
Consumer loans (3)
   
122
     
134
 
    Total loans held for investment, gross
   
915,288
     
881,338
 
                 
Advance payments of escrows
   
193
     
53
 
Deferred loan costs, net
   
6,636
     
5,610
 
Allowance for loan losses
   
(7,810
)
   
(7,076
)
    Total loans held for investment, net
 
$
914,307
   
$
879,925
 

(1)
Net of $5.5 million and $6.6 million of undisbursed loan funds as of March 31, 2020 and June 30, 2019, respectively
(2)
Net of $0.9 million and $1.0 million of undisbursed lines of credit as of March 31, 2020 and June 30, 2019, respectively.
(3)
Net of $0.5 million and $0.5 million of undisbursed lines of credit as of March 31, 2020 and June 30, 2019, respectively.


12

The following table sets forth information at March 31, 2020 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 one percent and two percent of loans held for investment at March 31, 2020 and June 30, 2019, respectively.  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
 
$
86,557
   
$
44,427
   
$
110,309
   
$
75,117
   
$
10,276
   
$
326,686
 
    Multi-family
   
149,627
     
160,236
     
154,391
     
11,523
     
164
     
475,941
 
    Commercial real estate
   
42,513
     
30,600
     
32,210
     
     
368
     
105,691
 
    Construction
   
4,902
     
     
     
     
1,444
     
6,346
 
Commercial business loans
   
100
     
     
     
     
402
     
502
 
Consumer loans
   
122
     
     
     
     
     
122
 
    Total loans held for investment,
       gross
 
$
283,821
   
$
235,263
   
$
296,910
   
$
86,640
   
$
12,654
   
$
915,288
 

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 sound 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.


13

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, 2020
 
(In Thousands)
 
Single-
family
   
Multi-
family
   
Commercial
Real Estate
   
Construction
   
Commercial Business
   
Consumer
   
Total
 
                                           
Pass
 
$
316,974
   
$
472,142
   
$
105,691
   
$
4,675
   
$
462
   
$
122
   
$
900,066
 
Special Mention
   
5,890
     
3,799
     
     
1,671
     
     
     
11,360
 
Substandard
   
3,822
     
     
     
     
40
     
     
3,862
 
Total loans held for
   investment, gross
 
$
326,686
   
$
475,941
   
$
105,691
   
$
6,346
   
$
502
   
$
122
   
$
915,288
 

   
June 30, 2019
 
(In Thousands)
 
Single-
family
   
Multi-
family
   
Commercial
Real Estate
   
Construction
   
Other
Mortgage
   
Commercial Business
   
Consumer
   
Total
 
                                                 
Pass
 
$
314,036
   
$
435,177
   
$
111,001
   
$
3,667
   
$
167
   
$
429
   
$
134
   
$
864,611
 
Special Mention
   
3,795
     
3,864
     
927
     
     
     
     
     
8,586
 
Substandard
   
7,121
     
     
     
971
     
     
49
     
     
8,141
 
Total loans held for
   investment, gross
 
$
324,952
   
$
439,041
   
$
111,928
   
$
4,638
   
$
167
   
$
478
   
$
134
   
$
881,338
 

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.  In response to the novel corona virus of 2019 (“COVID-19”) pandemic, which has negatively impacted the current economic environment, a qualitative component was established in the allowance for loan losses methodology.

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,

14

the charge-off occurs when the loan becomes 60 days delinquent.  The amount of the charge-off is determined by comparing the loan balance to the estimated fair value of the underlying collateral, less disposition costs, with the loan balance in excess of the estimated fair value charged-off against the allowance for loan losses.  The allowance for loan losses for non-performing loans is determined by applying 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 is provided to disclose additional details for the periods indicated on the Corporation’s allowance for loan losses:
   
For the Quarter Ended
March 31,
   
For the Nine Months Ended
March 31,
 
(Dollars in Thousands)
 
2020
   
2019
   
2020
   
2019
 
                         
Allowance at beginning of period
 
$
6,921
   
$
7,061
   
$
7,076
   
$
7,385
 
                                 
Provision (recovery) for loan losses
   
874
     
4
     
671
     
(450
)
                                 
Recoveries:
                               
Mortgage loans:
                               
      Single-family
   
14
     
22
     
63
     
177
 
Consumer loans
   
1
     
1
     
2
     
2
 
   Total recoveries
   
15
     
23
     
65
     
179
 
                                 
Charge-offs:
                               
Mortgage loans:
                               
      Single-family
   
     
(6
)
   
(1
)
   
(31
)
Consumer loans
   
     
(2
)
   
(1
)
   
(3
)
   Total charge-offs
   
     
(8
)
   
(2
)
   
(34
)
                                 
   Net recoveries (charge-offs)
   
15
     
15
     
63
     
145
 
      Balance at end of period
 
$
7,810
   
$
7,080
   
$
7,810
   
$
7,080
 
                                 
Allowance for loan losses as a percentage of gross
  loans held for investment at the end of the period
   
0.85
%
   
0.79
%
   
0.85
%
   
0.79
%
Net (recoveries) charge-offs as a percentage of average
  loans receivable, net, during the period (annualized)
   
(0.01
)%
   
(0.01
)%
   
(0.01
)%
   
(0.02
)%


15

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, 2020
 
(In Thousands)
 
Current
   
30-89 Days
Past Due
   
Non-Accrual (1)
   
Total Loans Held for Investment, Gross
 
                         
Mortgage loans:
                       
Single-family
 
$
320,104
   
$
2,760
   
$
3,822
   
$
326,686
 
Multi-family
   
475,941
     
     
     
475,941
 
Commercial real estate
   
105,691
     
     
     
105,691
 
Construction
   
6,346
     
     
     
6,346
 
Commercial business loans
   
462
     
     
40
     
502
 
Consumer loans
   
118
     
4
     
     
122
 
Total loans held for investment, gross
 
$
908,662
   
$
2,764
   
$
3,862
   
$
915,288
 

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

   
June 30, 2019
 
(In Thousands)
 
Current
   
30-89 Days
Past Due
   
Non-Accrual(1)
   
Total Loans Held for Investment, Gross
 
                         
Mortgage loans:
                       
Single-family
 
$
318,671
   
$
660
   
$
5,621
   
$
324,952
 
Multi-family
   
439,041
     
     
     
439,041
 
Commercial real estate
   
111,928
     
     
     
111,928
 
Construction
   
3,667
     
     
971
     
4,638
 
Other
   
167
     
     
     
167
 
Commercial business loans
   
429
     
     
49
     
478
 
Consumer loans
   
129
     
5
     
     
134
 
Total loans held for investment, gross
 
$
874,032
   
$
665
   
$
6,641
   
$
881,338
 

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


16

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, 2020
 
(In Thousands)
 
Single-
family
   
Multi-
family
   
Commercial
Real Estate
   
Construction
   
Commercial
Business
   
Consumer
   
Total
 
Allowance for loan losses:
                                         
Allowance at beginning of  period
 
$
2,157
   
$
3,502
   
$
1,058
   
$
168
   
$
28
   
$
8
   
$
6,921
 
Provision (recovery) for loan losses
   
431
     
456
     
3
     
(12
)
   
(2
)
   
(2
)
   
874
 
Recoveries
   
14
     
     
     
     
     
1
     
15
 
Charge-offs
   
     
     
     
     
     
     
 
Allowance for loan losses,
  end of period
 
$
2,602
   
$
3,958
   
$
1,061
   
$
156
   
$
26
   
$
7
   
$
7,810
 
                                                         
Allowance for loan losses:
                                                       
Individually evaluated for impairment
 
$
45
   
$
   
$
   
$
   
$
6
   
$
   
$
51
 
Collectively evaluated for impairment
   
2,557
     
3,958
     
1,061
     
156
     
20
     
7
     
7,759
 
Allowance for loan losses,
  end of period
 
$
2,602
   
$
3,958
   
$
1,061
   
$
156
   
$
26
   
$
7
   
$
7,810
 
                                                         
Loans held for investment:
                                                       
Individually evaluated for impairment
 
$
2,698
   
$
   
$
   
$
   
$
40
   
$
   
$
2,738
 
Collectively evaluated for impairment
   
323,988
     
475,941
     
105,691
     
6,346
     
462
     
122
     
912,550
 
Total loans held for investment,
  gross
 
$
326,686
   
$
475,941
   
$
105,691
   
$
6,346
   
$
502
   
$
122
   
$
915,288
 
Allowance for loan losses as
  a percentage of gross loans
  held for investment
   
0.80
%
   
0.83
%
   
1.00
%
   
2.46
%
   
5.18
%
   
5.74
%
   
0.85
%



17

   
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 %



18

   
Nine Months Ended March 31, 2020
 
(In Thousands)
 
Single-
family
   
Multi-
family
   
Commercial
Real Estate
   
Construction
   
Other
   
Commercial Business
   
Consumer
   
Total
 
Allowance for loan losses:
                                               
Allowance at beginning of  period
 
$
2,709
   
$
3,219
   
$
1,050
   
$
61
   
$
3
   
$
26
   
$
8
   
$
7,076
 
Provision (recovery) for loan losses
   
(169
)
   
739
     
11
     
95
     
(3
)
   
     
(2
)
   
671
 
Recoveries
   
63
     
     
     
     
     
     
2
     
65
 
Charge-offs
   
(1
)
   
     
     
     
     
     
(1
)
   
(2
)
Allowance for loan losses,
  end of period
 
$
2,602
   
$
3,958
   
$
1,061
   
$
156
   
$
   
$
26
   
$
7
   
$
7,810
 
                                                                 
Allowance for loan losses:
                                                               
Individually evaluated for impairment
 
$
45
   
$
   
$
   
$
   
$
   
$
6
   
$
   
$
51
 
Collectively evaluated for impairment
   
2,557
     
3,958
     
1,061
     
156
     
     
20
     
7
     
7,759
 
Allowance for loan losses,
  end of period
 
$
2,602
   
$
3,958
   
$
1,061
   
$
156
   
$
   
$
26
   
$
7
   
$
7,810
 
                                                                 
Loans held for investment:
                                                               
Individually evaluated for impairment
 
$
2,698
   
$
   
$
   
$
   
$
   
$
40
   
$
   
$
2,738
 
Collectively evaluated for impairment
   
323,988
     
475,941
     
105,691
     
6,346
     
     
462
     
122
     
912,550
 
Total loans held for investment,
  gross
 
$
326,686
   
$
475,941
   
$
105,691
   
$
6,346
   
$
   
$
502
   
$
122
   
$
915,288
 
Allowance for loan losses as
  a percentage of gross loans
  held for investment
   
0.80
%
   
0.8
%
   
1.00
%
   
2.46
%
   
%
   
5.18
%
   
5.74
%
   
0.85
%




19

   
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
%



20

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, 2020
 
     
Unpaid
                     
Net
 
     
Principal
   
Related
   
Recorded
         
Recorded
 
(In Thousands)
 
Balance
   
Charge-offs
   
Investment
   
Allowance (1)
   
Investment
 
                               
Mortgage loans:
                             
Single-family:
                             
With a related allowance
 
$
1,802
   
$
   
$
1,802
   
$
(274
)
 
$
1,528
 
Without a related allowance (2)
   
2,548
     
(475
)
   
2,073
     
     
2,073
 
Total single-family
   
4,350
     
(475
)
   
3,875
     
(274
)
   
3,601
 
                                         
Commercial business loans:
                                       
With a related allowance
   
40
     
     
40
     
(6
)
   
34
 
Total commercial business loans
   
40
     
     
40
     
(6
)
   
34
 
                                         
Total non-performing loans
 
$
4,390
   
$
(475
)
 
$
3,915
   
$
(280
)
 
$
3,635
 

(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.



21

     
At June 30, 2019
 
     
Unpaid
                     
Net
 
     
Principal
   
Related
   
Recorded
         
Recorded
 
(In Thousands)
 
Balance
   
Charge-offs
   
Investment
   
Allowance (1)
   
Investment
 
                               
Mortgage loans:
                             
Single-family:
                             
With a related allowance
 
$
2,640
   
$
   
$
2,640
   
$
(434
)
 
$
2,206
 
Without a related allowance (2)
   
3,518
     
(518
)
   
3,000
     
     
3,000
 
Total single-family
   
6,158
     
(518
)
   
5,640
     
(434
)
   
5,206
 
                                         
Construction:
                                       
Without a related allowance (2)
   
971
     
     
971
     
     
971
 
Total construction
   
971
     
     
971
     
     
971
 
                                         
Commercial business loans:
                                       
With a related allowance
   
49
     
     
49
     
(8
)
   
41
 
Total commercial business loans
   
49
     
     
49
     
(8
)
   
41
 
                                         
Total non-performing loans
 
$
7,178
   
$
(518
)
 
$
6,660
   
$
(442
)
 
$
6,218
 

(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 March 31, 2020, there were no commitments to lend additional funds to those borrowers whose loans were classified as non-performing.  At June 30, 2019, there was one non-performing construction loan with undisbursed loan funds of $1.0 million, which was subsequently upgraded to the special mention category in November 2019.

For the quarter ended March 31, 2020 and 2019, the Corporation’s average recorded investment in non-performing loans was $3.9 million and $6.4 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, 2020, the Bank received $71,000 in interest payments from non-performing loans, of which $29,000 were recognized as interest income and the remaining $42,000 were applied to reduce the loan balances under the cost recovery method.  In comparison, 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.

For the nine months ended March 31, 2020 and 2019, the Corporation’s average recorded investment in non-performing loans was $4.4 million and $6.7 million, respectively.  For the nine months ended March 31, 2020, the Bank received $275,000 in interest payments from non-performing loans, of which $186,000 were recognized as interest income and the remaining $89,000 were applied to reduce the loan balances under the cost recovery method.  In comparison, 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.

22

The following tables present the average recorded investment in non-performing loans and the related interest income recognized for the quarter and nine months ended March 31, 2020 and 2019:
     
Quarter Ended March 31,
 
   
2020
   
2019
 
     
Average
   
Interest
   
Average
   
Interest
 
     
Recorded
   
Income
   
Recorded
   
Income
 
(In Thousands)
 
Investment
   
Recognized
   
Investment
   
Recognized
 
                         
Without related allowances:
                       
Mortgage loans:
                       
Single-family
 
$
2,282
   
$
8
   
$
2,785
   
$
 
Construction
   
     
     
745
     
 
     
2,282
     
8
     
3,530
     
 
                                 
With related allowances:
                               
Mortgage loans:
                               
Single-family
   
1,569
     
20
     
2,841
     
29
 
Commercial business loans
   
40
     
1
     
54
     
1
 
     
1,609
     
21
     
2,895
     
30
 
                                 
Total
 
$
3,891
   
$
29
   
$
6,425
   
$
30
 

                         
     
Nine Months Ended March 31,
 
   
2020
   
2019
 
     
Average
   
Interest
   
Average
   
Interest
 
     
Recorded
   
Income
   
Recorded
   
Income
 
(In Thousands)
 
Investment
   
Recognized
   
Investment
   
Recognized
 
                         
Without related allowances:
                       
Mortgage loans:
                       
Single-family
 
$
2,747
   
$
119
   
$
3,570
   
$
229
 
Construction
   
361
     
20
     
579
     
 
     
3,108
     
139
     
4,149
     
229
 
                                 
With related allowances:
                               
Mortgage loans:
                               
Single-family
   
1,291
     
44
     
2,466
     
89
 
Commercial business loans
   
43
     
3
     
61
     
3
 
     
1,334
     
47
     
2,527
     
92
 
                                 
Total
 
$
4,442
   
$
186
   
$
6,676
   
$
321
 

For the quarter ended March 31, 2020, no new loans were restructured from their original terms and classified as restructured loans and no restructured loans were upgraded or downgraded. For the nine months ended March 31, 2020, no new loans were restructured from their original terms and classified as restructured loans, while two substandard restructured loans were paid
23

off, one restructured loan was downgraded from pass to the substandard category and one restructured loan was upgraded from special mention to the pass category. 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 the 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. During the quarter and nine months ended March 31, 2020 and 2019, no restructured loans were in default within a 12-month period subsequent to their original restructuring. Additionally, during the quarter and nine months ended March 31, 2020, there was no loan whose modification was extended beyond the initial maturity of the modification. During the nine months ended March 31, 2020, there was one restructured loan with a loan balance of $56,000 whose modification was extended. At both March 31, 2020 and June 30, 2019, there were no commitments to lend additional funds to those borrowers whose loans were restructured.

As of March 31, 2020, the Corporation held six restructured loans with a net outstanding balance of $1.8 million, all loans were classified as substandard and on non-accrual status. As of June 30, 2019, the Corporation held eight restructured loans with a net outstanding balance of $3.8 million: one loan was classified as special mention on accrual status ($437,000); one loan was classified as substandard on accrual status ($1.4 million); and six loans were classified as substandard on non-accrual status ($1.9 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, 2020 and June 30, 2019, $683,000 or 39%, and $2.4 million or 63%, 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.

The Coronavirus Aid, Relief, and Economic Security Act of 2020 signed into law on March 27, 2020 ("CARES Act") provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. At March 31, 2020 the Corporation had not made any short-term modifications as a result of the COVID-19 pandemic.

24

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, 2020
   
June 30, 2019
 
Restructured loans on non-accrual status:
           
      Mortgage loans:
           
        Single-family
 
$
1,726
   
$
1,891
 
      Commercial business loans
   
34
     
41
 
        Total
   
1,760
     
1,932
 
                 
Restructured loans on accrual status:
               
      Mortgage loans:
               
        Single-family
   
     
1,861
 
        Total
   
     
1,861
 
                 
        Total restructured loans
 
$
1,760
   
$
3,793
 

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, 2020
 
     
Unpaid
                     
Net
 
     
Principal
   
Related
   
Recorded
         
Recorded
 
(In Thousands)
 
Balance
   
Charge-offs
   
Investment
   
Allowance (1)
   
Investment
 
                               
Mortgage loans:
                             
Single-family:
                             
With a related allowance
 
$
677
   
$
   
$
677
   
$
(45
)
 
$
632
 
Without a related allowance (2)
   
1,459
     
(365
)
   
1,094
     
     
1,094
 
Total single-family
   
2,136
     
(365
)
   
1,771
     
(45
)
   
1,726
 
                                         
Commercial business loans:
                                       
With a related allowance
   
40
     
     
40
     
(6
)
   
34
 
Total commercial business loans
   
40
     
     
40
     
(6
)
   
34
 
                                         
Total restructured loans
 
$
2,176
   
$
(365
)
 
$
1,811
   
$
(51
)
 
$
1,760
 

(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.




25

     
At June 30, 2019
 
     
Unpaid
                     
Net
 
     
Principal
   
Related
   
Recorded
         
Recorded
 
(In Thousands)
 
Balance
   
Charge-offs
   
Investment
   
Allowance(1)
   
Investment
 
                               
Mortgage loans:
                             
Single-family:
                             
With a related allowance
 
$
2,199
   
$
   
$
2,199
   
$
(122
)
 
$
2,077
 
Without a related allowance(2)
   
2,040
     
(365
)
   
1,675
     
     
1,675
 
Total single-family
   
4,239
     
(365
)
   
3,874
     
(122
)
   
3,752
 
                                         
Commercial business loans:
                                       
With a related allowance
   
49
     
     
49
     
(8
)
   
41
 
Total commercial business loans
   
49
     
     
49
     
(8
)
   
41
 
                                         
Total restructured loans
 
$
4,288
   
$
(365
)
 
$
3,923
   
$
(130
)
 
$
3,793
 

(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, 2020 and 2019, no properties were acquired in the settlement of loans and no previously foreclosed upon properties were sold. For the nine months ended March 31, 2020, no properties were acquired in the settlement of loans and no previously foreclosed upon properties were sold. This compares to the nine months ended March 31, 2019 when no property was acquired in the settlement of loans, while two previously foreclosed upon properties were sold. As of March 31, 2020 and June 30, 2019, there was no real estate owned property at both dates.  A new appraisal is obtained on each of the properties at the time of foreclosure and fair value is derived by using the lower of the appraised value or the listing price of the property, net of selling costs.  Any initial loss is 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 condensed consolidated statements of operations.  In addition, the Corporation records costs to carry real estate owned as real estate operating expenses as incurred.

Note 6: 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, 2020 and June 30, 2019, the Corporation had commitments to extend credit on loans to be held for investment of $3.4 million and $4.3 million, respectively.

26

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, 2020
   
June 30, 2019
 
(In Thousands)
           
             
Undisbursed loan funds – Construction loans
 
$
5,485
   
$
6,592
 
Undisbursed lines of credit – Commercial business loans
   
920
     
1,003
 
Undisbursed lines of credit – Consumer loans
   
463
     
479
 
Commitments to extend credit on loans to be held for investment
   
3,353
     
4,254
 
Total
 
$
10,221
   
$
12,328
 

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 quarter and nine months ended March 31, 2020 and 2019.
   
For the Quarter Ended
March 31,
   
For the Nine Months Ended
March 31,
 
(In Thousands)
 
2020
   
2019
   
2020
   
2019
 
Balance, beginning of the period
 
$
138
   
$
150
   
$
141
   
$
157
 
Provision (recovery)
   
(47
)
   
1
     
(50
)
   
(6
)
Balance, end of the period
 
$
91
   
$
151
   
$
91
   
$
151
 

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. The Corporation does not apply hedge accounting to its derivative financial instruments; therefore, all changes in fair value are recorded in earnings. As of March 31, 2020 and June 30, 2019, there were no outstanding derivative financial instruments.

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 quarter and nine months ended March 31, 2020 and 2019 was as follows:
   
For the Quarter Ended
March 31,
   
For the Nine Months Ended
March 31,
 
Derivative Financial Instruments
 
2020
   
2019
   
2020
   
2019
 
(In Thousands)
                       
Commitments to extend credit on loans to be held for sale
 
$
   
$
(264
)
 
$
   
$
(585
)
Mandatory loan sale commitments and TBA MBS trades
   
     
465
     
     
216
 
Total net loss
 
$
   
$
201
   
$
   
$
(369
)

Loans previously sold to the FHLB – San Francisco under the Mortgage Partnership Finance (“MPF”) program have a recourse liability.  The FHLB – San Francisco absorbs the first four basis points of loss by establishing a first loss account and a credit scoring process is used to calculate the maximum recourse amount for the Bank.  All losses above the Bank’s maximum recourse amount are the responsibility of the FHLB – San Francisco.  The FHLB – San Francisco pays the Bank a credit enhancement fee on a monthly basis to compensate the Bank for accepting the recourse obligation.  As of March 31, 2020 and June 30, 2019, the Bank serviced $7.9 million and $9.7 million of loans under this program, respectively and has established a recourse liability of $50,000 at both dates.

27

Occasionally, the Bank is required to repurchase loans sold to Freddie Mac, Fannie Mae or other investors if it is determined that such loans do not meet the credit requirements of the investor, or if one of the parties involved in the loan misrepresented pertinent facts, committed fraud, or if such loans were 90-days past due within 120 days of the loan funding date.  During the quarter ended March 31, 2020, the Bank did not repurchase any loans. In comparison during the same quarter last year, the Bank repurchased two loans totaling $446,000 pursuant to the recourse/repurchase covenants contained in the loan sale agreements. During the first nine months of fiscal 2020, the Bank repurchased three loans totaling $1.1 million. In comparison during the first nine months of fiscal 2019, the Bank repurchased five loans totaling $699,000, including two loans totaling $25,000 that were fully charged off. There were no other repurchase requests that did not result in the repurchase of the loan itself, which were settled in the quarter and nine months ended March 31, 2020 and 2019. In addition to the specific recourse liability for the MPF program, the Bank established a recourse liability of $200,000 for loans sold to other investors as of both March 31, 2020 and June 30, 2019.

The following table shows the summary of the recourse liability for the quarter and nine months ended March 31, 2020 and 2019:
   
For the Quarter Ended
March 31,
   
For the Nine Months Ended
March 31,
 
Recourse Liability
 
2020
   
2019
   
2020
   
2019
 
(In Thousands)
                       
                         
Balance, beginning of the period
 
$
250
   
$
250
   
$
250
   
$
283
 
Provision (recovery) from recourse liability
   
     
     
     
(33
)
Net settlements in lieu of loan repurchases
   
     
     
     
 
Balance, end of the period
 
$
250
   
$
250
   
$
250
   
$
250
 


Note 7: 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.  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.



28

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:
(In Thousands)
Aggregate
Fair Value
Aggregate
Unpaid
Principal
Balance
Net
Unrealized
Loss
As of March 31, 2020:
     
Loans held for investment, at fair value
$
3,835
 
$
3,971
 
$
(136
)
       
As of June 30, 2019:
     
Loans held for investment, at fair value
$
5,094
 
$
5,218
 
$
(124
)

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

Investment securities - available for sale are primarily comprised of U.S. government agency MBS, 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).

29

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).

Non-performing loans are loans which are inadequately protected by the current sound 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).

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.


30

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, 2020 Using:
(In Thousands)
Level 1
Level 2
Level 3
Total
Assets:
       
    Investment securities - available for sale:
       
        U.S. government agency MBS
$
 
$
3,001
 
$
 
$
3,001
 
        U.S. government sponsored enterprise MBS
 
1,630
 
 
1,630
 
        Private issue CMO
 
 
197
 
197
 
            Investment securities - available for sale
 
4,631
 
197
 
4,828
 
         
    Loans held for investment, at fair value
 
 
3,835
 
3,835
 
    Interest-only strips
 
 
13
 
13
 
Total assets
$
 
$
4,631
 
$
4,045
 
$
8,676
 
         
Liabilities
$
 
$
 
$
 
$
 
Total liabilities
$
 
$
 
$
 
$
 

 
Fair Value Measurement at June 30, 2019 Using:
(In Thousands)
Level 1
Level 2
Level 3
Total
Assets:
       
    Investment securities - available for sale:
       
        U.S. government agency MBS
$
 
$
3,613
 
$
 
$
3,613
 
        U.S. government sponsored enterprise MBS
 
2,087
 
 
2,087
 
        Private issue CMO
 
 
269
 
269
 
            Investment securities - available for sale
 
5,700
 
269
 
5,969
 
         
    Loans held for investment, at fair value
 
 
5,094
 
5,094
 
    Interest-only strips
 
 
16
 
16
 
Total assets
$
 
$
5,700
 
$
5,379
 
$
11,079
 
         
Liabilities:
$
 
$
 
$
 
$
 
Total liabilities
$
 
$
 
$
 
$
 





31

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, 2020
 
   
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
   
Total
 
Beginning balance at December 31, 2019
 
$
231
   
$
4,173
   
$
13
   
$
4,417
 
    Total gains or losses (realized/unrealized):
                               
        Included in earnings
   
     
(25
)
   
     
(25
)
        Included in other comprehensive loss
   
(26
)
   
     
     
(26
)
    Purchases
   
     
     
     
 
    Issuances
   
     
     
     
 
    Settlements
   
(8
)
   
(313
)
   
     
(321
)
    Transfers in and/or out of Level 3
   
     
     
     
 
Ending balance at March 31, 2020
 
$
197
   
$
3,835
   
$
13
   
$
4,045
 

(1)
The valuation of loans held for investment at fair value includes 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.

   
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.


32

    For the Nine Months Ended March 31, 2020
 
   
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
   
Total
 
Beginning balance at June 30, 2019
 
$
269
   
$
5,094
   
$
16
   
$
5,379
 
    Total gains or losses (realized/unrealized):
                               
        Included in earnings
   
     
(12
)
   
     
(12
)
        Included in other comprehensive loss
   
(29
)
   
     
(3
)
   
(32
)
    Purchases
   
     
     
     
 
    Issuances
   
     
     
     
 
    Settlements
   
(43
)
   
(1,247
)
   
     
(1,290
)
    Transfers in and/or out of Level 3
   
     
     
     
 
Ending balance at March 31, 2020
 
$
197
   
$
3,835
   
$
13
   
$
4,045
 

(1)
The valuation of loans held for investment at fair value includes 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.


   
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.


33


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, 2020 Using:
(In Thousands)
Level 1
Level 2
Level 3
Total
Non-performing loans
$
 
$
2,073
 
$
1,562
 
$
3,635
 
Mortgage servicing assets
 
 
386
 
386
 
Real estate owned, net
 
 
 
 
Total
$
 
$
2,073
 
$
1,948
 
$
4,021
 

 
Fair Value Measurement at June 30, 2019 Using:
(In Thousands)
Level 1
Level 2
Level 3
Total
Non-performing loans
$
 
$
3,971
 
$
2,247
 
$
6,218
 
Mortgage servicing assets
 
 
627
 
627
 
Real estate owned, net
 
 
 
 
Total
$
 
$
3,971
 
$
2,874
 
$
6,845
 






34

The following table presents additional information about valuation techniques and inputs used for assets and liabilities, which are measured at fair value and categorized within Level 3 as of March 31, 2020:
(Dollars In Thousands)
Fair Value
As of
March 31,
2020
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
$
197
 
Market comparable
pricing
Comparability adjustment
(9.9)% - (10.7)%
((10.0)%)
Increase
           
Loans held for investment, at
   fair value
$
3,835
 
Relative value
analysis
Broker quotes
Credit risk factor
98.0% - 104.6%
(100.9%) of par
1.3% - 100.0% (4.3%)
Increase

Decrease
           
Non-performing loans(3)
$
666
 
Discounted cash flow
Default rates
5.0%
Decrease
           
Non-performing loans(4)
$
896
 
Relative value
analysis
Credit risk factor
20.0% - 30.0% (20.4%)
Decrease
           
Mortgage servicing assets
$
386
 
Discounted cash flow
Prepayment speed (CPR)
Discount rate
18.7% - 60.0% (31.2%)
9.0% - 10.5% (9.1%)
Decrease
Decrease
           
Interest-only strips
$
13
 
Discounted cash flow
Prepayment speed (CPR)
Discount rate
18.7% - 37.5% (36.2%)
9.0%
Decrease
Decrease
           
Liabilities:
         
None
             
           
(1)
The range is based on the historical 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)
Consists of restructured loans.
(4)
Consists of other non-performing loans, excluding restructured loans.

The significant unobservable inputs used in the fair value measurement of the Corporation’s assets and liabilities include the following: prepayment speeds, discount rates and broker quotes, 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.


35

The carrying amount and fair value of the Corporation’s other financial instruments as of March 31, 2020 and June 30, 2019 was as follows:
 
March 31, 2020
(In Thousands)
Carrying
Amount
Fair
Value

Level 1

Level 2

Level 3
Financial assets:
         
Investment securities - held to maturity
$
69,482
 
$
71,399
 
$
 
$
71,399
 
$
 
Loans held for investment, not recorded at fair value
$
910,472
 
$
905,972
 
$
 
$
 
$
905,972
 
FHLB – San Francisco stock
$
8,199
 
$
8,199
 
$
 
$
8,199
 
$
 
           
Financial liabilities:
         
Deposits
$
835,831
 
$
807,962
 
$
 
$
 
$
807,962
 
Borrowings
$
131,070
 
$
136,606
 
$
 
$
 
$
136,606
 

 
June 30, 2019
(In Thousands)
Carrying
Amount
Fair
Value

Level 1

Level 2

Level 3
Financial assets:
         
Investment securities - held to maturity
$
94,090
 
$
95,359
 
$
 
$
95,359
 
$
 
Loans held for investment, not recorded at fair value
$
874,831
 
$
861,374
 
$
 
$
 
$
861,374
 
FHLB – San Francisco stock
$
8,199
 
$
8,199
 
$
 
$
8,199
 
$
 
           
Financial liabilities:
         
Deposits
$
841,271
 
$
813,087
 
$
 
$
 
$
813,087
 
Borrowings
$
101,107
 
$
102,826
 
$
 
$
 
$
102,826
 

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.

36

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, 2020, there were no significant changes to the Corporation’s valuation techniques that had, or are expected to have, a material impact on its condensed consolidated financial position or results of operations.

Note 8: Reclassification Adjustment of Accumulated Other Comprehensive Income ("AOCI")

The following tables provide the changes in AOCI by component for the quarter and nine months ended March 31, 2020 and 2019.
 
For the Quarter Ended March 31, 2020
 
Unrealized gains and losses on
(In Thousands)
Investment securities
available for sale
Interest-
only strips
Total
       
Beginning balance at December 31, 2019
$
124
 
$
9
 
$
133
 
       
Other comprehensive loss before reclassifications
(66
)
 
(66
)
Amount reclassified from accumulated other comprehensive income
 
 
 
Net other comprehensive loss
(66
)
 
(66
)
       
Ending balance at March 31, 2020
$
58
 
$
9
 
$
67
 

 
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
 
   

37

 
For the Nine Months Ended March 31, 2020
 
Unrealized gains and losses on
(In Thousands)
Investment securities
available for sale
Interest-
only strips
Total
       
Beginning balance at June 30, 2019
$
150
 
$
11
 
$
161
 
       
Other comprehensive loss before reclassifications
(92
)
(2
)
(94
)
Amount reclassified from accumulated other comprehensive income
 
 
 
Net other comprehensive loss
(92
)
(2
)
(94
)
       
Ending balance at March 31, 2020
$
58
 
$
9
 
$
67
 

 
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
 


Note 9: 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 Corporation expects to be entitled to receive. The largest portion of the Corporation's revenue is from interest income, which is not in the scope of ASC 606. All of the Corporation's revenue from contracts with customers in the scope of ASC 606 is recognized in non-interest income.

If a contract is determined to be within the scope of ASC 606, the Corporation 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 Corporation is generally the principal in these contracts, with the exception of interchanges fees, in which case the Corporation 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.

38

Disaggregation of Revenue:

The following table includes the Corporation's non-interest income disaggregated by type of services for the quarter and nine months ended March 31, 2020 and 2019:

 
For the Quarter Ended
 March 31,
 For the Nine Months Ended
March 31,
Type of Services
2020
2019
2020
2019
(In Thousands)
       
Asset management fees
$
70
 
$
77
 
$
234
 
$
215
 
Debit card and ATM fees
380
 
           395
 
1,195
 
       1,227
 
Deposit related fees
439
 
           484
 
1,370
 
       1,522
 
Loan related fees
12
 
             12
 
26
 
             25
 
BOLI (1)
48
 
             47
 
141
 
           140
 
Loan servicing fees (1)
131
 
           262
 
631
 
           863
 
Net gain (loss) on sale of loans (1) (2)
14
 
       1,719
 
(115
)
       7,114
 
Other
7
 
             56
 
33
 
             90
 
Total non-interest income
$
1,101
 
$
3,052
 
$
3,515
 
$
11,196
 

(1)
Not in scope of ASC 606.
(2)
There were no loan sales in the quarter and first nine months of fiscal 2020 as compared to the loan sale volume of $95.8 million and $408.9 million for the quarter and first nine months of fiscal 2019, respectively.

For the quarter and nine months ended March 31, 2020 and 2019, substantially all of the Corporation'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.

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.


39

Note 10: Leases

The Corporation accounts for its leases in accordance with ASC 842, which was implemented on July 1, 2019, and requires the Corporation to record liabilities for future lease obligations as well as assets representing the right to use the underlying leased assets. The Corporation’s leases primarily represent future obligations to make payments for the use of buildings, space or equipment for its operations. Liabilities to make future lease payments are recorded in accounts payable, accrued interest and other liabilities, while right-of-use assets are recorded in premises and equipment in the Corporation’s condensed consolidated statements of financial condition. At March 31, 2020, all of the Corporation’s leases were classified as operating leases and the Corporation did not have any operating leases with an initial term of 12 months or less (“short-term leases”). Liabilities to make future lease payments and right of use assets are recorded for operating leases and do not include short-term leases. These liabilities and right-of-use assets are determined based on the total contractual base rents for each lease, which include options to extend or renew each lease, where applicable, and where the Corporation believes it has an economic incentive to extend or renew the lease. Due to the fact that lease extensions are not reasonably certain,  the Corporation generally does not recognize payments occurring during option periods in the calculation of its operating right-of-use lease assets and operating lease liabilities. The Corporation utilizes the FHLB - San Francisco rates as a discount rate for each of the remaining contractual terms at the adoption date as well as for future leases if the discount rate is not stated in the lease. For leases that contain variable lease payments, the Corporation assumes future lease payment escalations based on a lease payment escalation rate specified in the lease or the specified index rate observed at the time of lease commencement. Liabilities to make future lease payments are accounted for using the interest method, being reduced by periodic contractual lease payments net of periodic interest accretion. Right-of-use assets for operating leases are amortized over the term of the associated lease by amounts that represent the difference between periodic straight-line lease expense and periodic interest accretion in the related liability to make future lease payments.

For the quarter and nine months ended March 31, 2020, expenses associated with the Corporation’s leases totaled $212,000 and $613,000, respectively, and was recorded in premises and occupancy expenses and equipment expenses in the condensed consolidated statements of operations.



40

The following table presents supplemental information related to operating leases at the date and for the periods indicated:

(In Thousands)
Quarter
Ended
March 31, 2020
Nine Months
Ended
March 31, 2020
As of
March 31, 2020
Condensed Consolidated Statements of Condition:
     
Premises and equipment - Operating lease right of use assets
           
$
2,745
 
Accounts payable, accrued interest and other liabilities –
Operating lease liabilities
           
$
2,877
 
                   
Condensed Consolidated Statements of Operations:
     
Premises and occupancy expenses from operating leases (1) (2)
$
195
 
$
569
       
Equipment expenses from operating leases
$
17
 
$
44
       
       
Condensed Consolidated Statements of Cash Flows:
                 
Operating cash flows from operating leases, net(2)
$
243
 
$
806
       

(1)
Variable lease costs are immaterial.
(2)
Revenue related to sublease activity is immaterial and netted against operating lease expenses.

The following table provides information related to remaining minimum contractual lease payments and other information associated with the Corporation’s leases as of March 31, 2020:

 
Amount(1)
Year Ending June 30,
(In Thousands)
2020
$
233
 
2021
753
 
2022
677
 
2023
478
 
2024
361
 
Thereafter
530
 
Total contract lease payments
$
3,032
 
     
Total liability to make lease payments
$
2,877
 
Difference in undiscounted and discounted future lease payments
$
155
 
Weighted average discount rate
 
2.15
 %
Weighted average remaining lease term (years)
 
4.7
 

(1)  Contractual base rents do not include property taxes and other operating expenses due under respective lease agreements.

41

The following table summarizes the impact of the adoption of the new lease accounting guidance on the Corporation’s condensed consolidated statements of financial condition as of July 1, 2019:

(In Thousands)
June 30,
2019
Adjustments
due to new
lease guidance
July 1,
2019
March 31,
2020
Total assets
$
1,084,850
 
$
3,399
 
$
1,088,249
 
$
1,107,567
 
Total liabilities
$
964,209
 
$
3,704
 
$
967,913
 
$
984,409
 
Total equity
$
120,641
 
$
 
$
120,641
 
$
123,158
 



Note 12: Subsequent Events

On April 30, 2020, 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, 2020 are entitled to receive the cash dividend. The cash dividend will be payable on June 11, 2020.

On April 30, 2020, the Corporation announced that the Corporation’s Board of Directors authorized the repurchase of up to five percent of the Corporation’s common stock, or approximately 371,815 shares. The Corporation will purchase the shares from time to time in the open market or through privately negotiated transactions over a one-year period depending on market conditions, the capital requirements of the Corporation, and available cash that can be allocated to the stock repurchase program, among other considerations.


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, 2020, the Corporation had total assets of $1.11 billion, total deposits of $835.8 million and total stockholders’ equity of $123.2 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 operates in a single business segment through the Bank. The Bank's activities include attracting deposits, offering banking services and originating and purchasing single-family, multi-family, commercial real estate, construction and,  to a lesser extent, other mortgage, commercial business and consumer loans.  Deposits are collected primarily from 13 banking locations located in Riverside and San Bernardino counties in California. Loans are primarily originated and purchased in Southern and Northern California. There are various risks inherent in the Corporation’s business including, among others, the

42

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 buy and sell loans, competitive conditions, legislative and regulatory changes, fraud and other risks.

The Corporation began to distribute quarterly cash dividends in the quarter ended September 30, 2002.  On January 28, 2020, 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 18, 2020, which was paid on March 10, 2020.  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, 2020, 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, 2020 will be entitled to receive the cash dividend.  The cash dividend will be payable on June 11, 2020.

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. 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 effect of the novel coronavirus of 2019 (“COVID-19”) pandemic, including on the Corporation’s credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity; 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; uncertainty regarding the future of the London Interbank Offered Rate ("LIBOR"), and the potential transition away from LIBOR toward new interest rate benchmarks; 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 purchase and 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

43

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, California Consumer Privacy 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 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 including the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") 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 2019 Annual Report on Form 10-K for the year ended June 30, 2019 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, 2020 to the critical accounting policies as described in the Corporation’s 2019 Annual Report on Form 10-K for the period ended June 30, 2019.

44

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 and through its subsidiary, Provident Financial Corp.  The business activities of the Corporation, primarily through the Bank and its subsidiary, consist of community 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 borrowers and depositors, such as late payment charges, prepayment fees, 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, 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 anticipated growth of total assets, 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. Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including the recent 150 basis point reductions in the targeted Federal Funds Rate, until the pandemic subsides, the Corporation expects its net interest income and net interest margin will be adversely affected in 2020 and possibly longer.

Saleable single-family mortgage loan operations primarily consist of the origination and sale of mortgage loans secured by single-family residences. The primary sources of income in the saleable mortgage loan operations 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 best interests of the Corporation to scale back saleable single-family mortgage loan originations and improve on its efforts to increase the volume of portfolio single-family mortgage loan originations.

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.


45

COVID-19 Impact to the Corporation

The Corporation is actively monitoring and responding to the effects of the rapidly-changing COVID-19 pandemic. The health, safety and well-being of our customers, employees and communities are the Corporation’s top priorities. Centers of Disease Control (“CDC”) guidelines, as well as directives from federal, state, county and local officials, are being closely followed to make informed operational decisions.

During this unprecedented time, the Corporation is working diligently with its employees to implement CDC-advised health, hygiene and social distancing practices. To avoid service disruptions, most of our employees currently work from the Corporation’s premises and promote social distancing standards. To date, there have been no service disruptions. The Corporation’s Employee Assistance Program is provided at no cost for employees and family members seeking counseling services for mental health and emotional support needs. The Corporation also adheres to the Families First Coronavirus Response Act (FFCRA), which includes the Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion.

During the COVID-19 pandemic, taking care of customers and providing uninterrupted access to services are top priorities for the Corporation. All of the Corporation’s banking centers are open for business with regular business hours while implementing CDC guidelines for social distancing and enhanced cleaning. Customers can also conduct their banking business using drive throughs, the online and mobile banking services, ATMs, and telephone banking.

On March 27, 2020, the CARES Act was signed into law. Among other things, the CARES Act provides relief to borrowers, including the opportunity to defer loan payments while not negatively affecting their credit standing. For commercial and consumer customers, the Corporation has provided relief options, including payment deferrals and fee waivers.

All loans modified due to COVID-19 will be separately monitored and any request for continuation of relief beyond the initial modification will be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate.

As of April 30, 2020, the Corporation has processed and deemed eligible approximately 27 single-family forbearance requests, totaling $12.9 million or 1.4 percent of total loans, and  approximately four multi-family, commercial real estate, and business loan requests, totaling $4.3 million or 0.6 percent of total loans.

After the payment deferral period, normal loan payments will once again become due and payable. The forbearance amount will be due and payable in full as a balloon payment at the end of the loan term or sooner if the loan becomes due and payable in full at an earlier date. We believe the steps we are taking are necessary to effectively manage our portfolio and assist our clients through the ongoing uncertainty surrounding the duration, impact and government response to the COVID-19 pandemic.


For customers that may need access to funds in their certificates of deposit to assist with living expenses during the COVID-19 pandemic, the Corporation is waiving early withdrawal penalties on a case by case basis. Overdraft and other fees are also waived on a case-by-case basis. We are cautious when paying overdrafts beyond the client's total deposit relationship, overdraft protection options or their overdraft coverage limits.

The Corporation anticipates that the COVID-19 pandemic will continue to impact our business in future periods in one or more of the following ways, among others:
Higher provisions for certain commercial real estate loans may be incurred, especially to borrowers with tenants in industries, such as hospitality, travel, food service and restaurants and bars, and businesses providing physical services;
Significantly lower market interest rates which may have a negative impact on variable rate loans indexed to LIBOR, U.S. treasury and prime indices and on deposit pricing, as interest rate adjustments typically lag the effect on the yield


46


earned on interest-earning assets because rates on many deposit accounts are decision-based, not tied to a specific market-based index, and are based on competition for deposits;
Certain additional fees for deposit and loan products may be waived or reduced;
Non-interest income may decline due to a decrease in fees earned as spending by debit card customers complying with  “Stay at Home” requirements and who otherwise may be adversely affected by reductions in their personal income or job losses;
Non-interest expenses related to the effects of the COVID-19 pandemic may increase, including cleaning costs, supplies, equipment and other items; and
Additional loan forbearance or modifications may occur and borrowers may default on their loans, which may necessitate further increases to the allowance for loan losses.

While the full impact of COVID-19 on the Corporation's future financial results is uncertain and not currently estimable, the Corporation believes that the impact could be materially adverse to our financial condition and results of operations depending on the length and severity of the economic downturn brought on by the COVID-19 pandemic.


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 Notes 6 and 10 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements.

Contractual Obligations.  The following table summarizes the Corporation’s contractual obligations at March 31, 2020 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
$
1,780
 
$
2,870
 
$
567
 
$
110
 
$
5,327
 
Pension benefits
259
 
517
 
518
 
6,150
 
7,444
 
Time deposits
102,955
 
64,455
 
20,394
 
807
 
188,611
 
FHLB – San Francisco advances
22,964
 
54,794
 
51,577
 
10,046
 
139,381
 
FHLB – San Francisco letter of credit
10,000
 
 
 
 
10,000
 
FHLB – San Francisco MPF credit enhancement (1)
 
 
 
2,458
 
2,458
 
Total
$
137,958
 
$
122,636
 
$
73,056
 
$
19,571
 
$
353,221
 

(1)
Represents the potential maximum potential recourse obligation for loans previously sold by the Bank to the FHLB – San Francisco under its Mortgage Partnership Finance (“MPF”) program.  As of March 31, 2020, the Bank serviced $7.9 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.

47

Comparison of Financial Condition at March 31, 2020 and June 30, 2019

Total assets increased $22.7 million, or two percent, to $1.11 billion at March 31, 2020 from $1.08 billion at June 30, 2019.  The increase was primarily attributable to increases in loans held for investment and cash and cash equivalents, partly offset by a decrease in investment securities.

Total cash and cash equivalents, primarily excess cash deposited with the Federal Reserve Bank of San Francisco, increased $13.6 million, or 19 percent, to $84.3 million at March 31, 2020 from $70.6 million at June 30, 2019.  The increase in the total cash and cash equivalents was primarily attributable to the pay downs of investment securities and the increase in borrowings, partly offset by the utilization of cash to fund the increase in loans held for investment.

Investment securities (held to maturity and available for sale) decreased $25.7 million, or 26 percent, to $74.3 million at March 31, 2020 from $100.1 million at June 30, 2019. The decrease was primarily the result of scheduled and accelerated principal payments on mortgage-backed securities during the first nine months of fiscal 2020. For further analysis on investment securities, see Note 4 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements of this Form 10-Q.

Loans held for investment increased $34.4 million, or four percent, to $914.3 million at March 31, 2020 from $879.9 million at June 30, 2019, primarily due to a $36.9 million increase in multi-family loans.  During the first nine months of fiscal 2020, the Corporation originated $88.3 million of loans held for investment, consisting primarily of multi-family and single-family loans and also purchased $115.6 million of single-family and multi-family loans held for investment that are located throughout California. Total loan principal payments during the first nine months of fiscal 2020 were $171.7 million, up 22 percent from $140.5 million during the comparable period in fiscal 2019. The single-family loans held for investment balance at March 31, 2020 and June 30, 2019 was $326.7 million and $325.0 million, respectively, and represented approximately 36 percent and 37 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, 2020 and June 30, 2019, as a percentage of the total dollar amount outstanding:

As of March 31, 2020:
 
Inland
Empire
Southern
California(1)
Other
California
Other
States
Total
Loan Category
Balance
%
Balance
%
Balance
%
Balance
%
Balance
%
Single-family
$
88,682
 
27
%
$
154,913
 
48
%
$
82,393
 
25
%
$
698
 
%
$
326,686
 
100
%
Multi-family
68,184
 
14
%
300,413
 
63
%
107,029
 
23
%
315
 
%
475,941
 
100
%
Commercial real
  estate
23,913
 
23
%
47,968
 
45
%
33,810
 
32
%
 
%
105,691
 
100
%
Construction
792
 
13
%
4,264
 
67
%
1,290
 
20
%
 
%
6,346
 
100
%
Total
$
181,571
 
20
%
$
507,558
 
55
%
$
224,522
 
25
%
$
1,013
 
%
$
914,664
 
100
%

(1)
Other than the Inland Empire.


48

As of June 30, 2019:
 
Inland
Empire
Southern
California(1)
Other
California
Other
States
Total
Loan Category
Balance
%
Balance
%
Balance
%
Balance
%
Balance
%
Single-family
$
104,967
 
33
%
$
146,963
 
45
%
$
71,997
 
22
%
$
1,025
 
%
$
324,952
 
100
%
Multi-family
70,241
 
16
%
272,282
 
62
%
96,192
 
22
%
326
 
%
439,041
 
100
%
Commercial real
  estate
30,551
 
27
%
54,010
 
48
%
27,367
 
25
%
 
%
111,928
 
100
%
Construction
525
 
11
%
3,579
 
77
%
534
 
12
%
 
%
4,638
 
100
%
Other
 
%
 
%
167
 
100
%
 
%
167
 
100
%
Total
$
206,284
 
24
%
$
476,834
 
54
%
$
196,257
 
22
%
$
1,351
 
%
$
880,726
 
100
%

(1)
Other than the Inland Empire.

Total deposits decreased $5.4 million to $835.8 million at March 31, 2020 from $841.3 million at June 30, 2019.  Time deposits decreased $7.5 million, or four percent, to $185.6 million at March 31, 2020 from $193.1 million at June 30, 2019, while transaction accounts increased slightly to $650.2 million at March 31, 2020 from $648.1 million at June 30, 2019. The percentage of time deposits to total deposits decreased to 22 percent at March 31, 2020 from 23 percent at June 30, 2019, primarily due to a managed run-off of higher cost time deposits consistent with the reduction in the Bank’s funding needs resulting from no loans originated for sale during the first nine months of fiscal 2020.

Total borrowings increased $30.0 million, or 30 percent, to $131.1 million at March 31, 2020 as compared to $101.1 million at June 30, 2019, due to additional long-term borrowings obtained with a lower average cost during the first quarter of fiscal 2020. The borrowings were primarily comprised of long-term FHLB - San Francisco advances used for interest rate risk management purposes.

Total stockholders’ equity increased $2.5 million, or two percent, to $123.2 million at March 31, 2020 from $120.6 million at June 30, 2019, primarily as a result of the year-to-date net income of $6.1 million and stock-based compensation of $933,000, partly offset by $3.1 million of quarterly cash dividends paid to shareholders and stock repurchases of $1.3 million during the first nine months of fiscal 2020. The Corporation repurchased 66,041 shares of its common stock during the nine months ended March 31, 2020 at an average cost of $19.43 per share.


Comparison of Operating Results for the Quarter and Nine Months Ended March 31, 2020 and 2019

The Corporation’s net income for the third quarter of fiscal 2020 was $1.1 million, in contrast to net loss of $151,000 in the same period of fiscal 2019. Compared to the same quarter last year, the increase was primarily attributable to lower non-interest expenses (mainly from salaries and employee benefits expenses decreasing due to no saleable single-family loan originations this quarter), partly offset by lower non-interest income (mainly due to significantly lower gain on sale of loans), higher provision for loan losses (mainly due to the COVID-19 pandemic) and lower net interest income. Earnings for the quarter reflect the impact of the COVID-19 pandemic which resulted in a substantial reduction in business activity or the closing of businesses in California.

For the first nine months of fiscal 2020, the Corporation’s net income was $6.1 million, an increase of $2.5 million, or 68 percent, from $3.6 million in the same period of fiscal 2019. Compared to the same period last year, the increase in earnings was primarily attributable to a decrease in non-interest expense, partly offset by a decrease in non-interest income in both cases reflecting the scaling back of originations and sales of single-family loans and an increase in the provision for loan losses.  The decrease in non-interest expense was mainly attributable to a decrease in salaries and employee benefits expenses and a decrease in premises and occupancy expenses.

49

The Corporation’s efficiency ratio, defined as non-interest expense divided by the sum of net interest income and non-interest income, improved to 75 percent for the third quarter of fiscal 2020 from 103 percent in the same period of fiscal 2019. For the first nine months of fiscal 2020, the Corporation’s efficiency ratio improved to 71 percent from 89 percent for the same period of fiscal 2019.

Return on average assets was 0.41 percent in the third quarter of fiscal 2020, in contrast to (0.05) percent in the same period last year. For the first nine months of fiscal 2020, return on average assets was 0.74 percent, up 32 basis points from 0.42 percent in the same period last year.

Return on average equity was 3.70 percent in the third quarter of fiscal 2020, in contrast to (0.49) percent in the same period last year. For the first nine months of fiscal 2020, return on average equity was 6.64 percent as compared to 3.97 percent for the same period last year.

Diluted earnings per share for the third quarter of fiscal 2020 were $0.15, in contrast to diluted losses per share of $0.02 in the same period last year. For the first nine months of fiscal 2020, diluted earnings per share were $0.80, a 67 percent increase from $0.48 in the same period last year.

Net Interest Income:

For the Quarters Ended March 31, 2020 and 2019.  Net interest income decreased by $722,000, or eight percent, to $8.9 million for the third quarter of fiscal 2020 from $9.6 million in the same period in fiscal 2019, as a result of a lower net interest margin and, to a lesser extent, a lower average interest-earning asset balance. The net interest margin decreased 23 basis points to 3.30 percent in the third quarter of fiscal 2020 from 3.53 percent in the same period of fiscal 2019, primarily due to a decrease in the average yield on interest-earning assets. The weighted-average yield on interest-earning assets decreased by 22 basis points to 3.87 percent in the third quarter of fiscal 2020 from 4.09 percent in the same quarter last year, and the weighted-average cost of interest-bearing liabilities increased by one basis point to 0.64 percent for the third quarter of fiscal 2020 as compared to 0.63 percent in the same quarter last year. The decrease in the average yield of interest-earning assets was primarily due to decreases in the average yield of loans receivable and interest-earning deposits, partly offset by an increase in the average yield on investment securities. The average balance of interest-earning assets decreased $11.3 million, or one percent, to $1.08 billion in the third quarter of fiscal 2020 from $1.09 billion in the comparable period of fiscal 2019, reflecting decreases in the average balance of investment securities and interest-earning deposits, partly offset by an increase in the average balance of loans receivable. The average balance of interest-bearing liabilities decreased by $11.1 million, or one percent, to $967.9 million in the third quarter of fiscal 2020 from $979.0 million in the same quarter last year primarily reflecting a decrease in the average balance of interest-bearing deposits, partly offset by an increase in the average balance of borrowings.

Beginning in August 2019, the Federal Reserve reduced the targeted Federal Funds Rate by 25 basis points three times in 2019 and 150 basis points during the current quarter to a range of 0.00% to 0.25% at March 31, 2020.  The 150 basis-point decrease in the targeted Federal Funds Rate in response to COVID-19 pandemic did not occur until late in the quarter in March 2020, and the full effect of the lower interest rate environment had not yet been realized at quarter end.  Furthermore, the effect of recent changes in the targeted Federal Funds Rate on the cost of funding liabilities typically lags the effect on the yield earned on interest-earning assets because rates on many deposit accounts are decision-based, not tied to a specific market-based index, and are based on competition for deposits while most interest-earning assets adjust earlier because they are tied to a specific market-based index. Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including the recent 150 basis point reductions in the targeted Federal Funds Rate, until the pandemic subsides, the Corporation expects its net interest income and net interest margin will be adversely affected in 2020 and possibly longer.


50

For the Nine Months Ended March 31, 2020 and 2019.  Net interest income decreased by $689,000, or two percent, to $28.1 million for the first nine months of fiscal 2020 from $28.8 million the same period in fiscal 2019, as a result of a lower average interest-earning asset balance, partly offset by a higher net interest margin. The average balance of interest-earning assets decreased $43.2 million, or four percent, to $1.07 billion in the first nine months of fiscal 2020 from $1.11 billion in the comparable period of fiscal 2019, primarily reflecting decreases in the average balance of loans receivable, investment securities and interest earning deposits. The average balance of interest-bearing liabilities decreased by $42.7 million, or four percent, to $958.3 million in the first nine months of fiscal 2020 from $1.00 billion in the same period last year primarily reflecting a decrease in the average balance of interest-bearing deposits, partly offset by an increase in the average balance of borrowings. The net interest margin was 3.51 percent in the first nine months of fiscal 2020, up six basis points from 3.45 percent in the same period of fiscal 2019, primarily due to an increase in the average yield on interest-earning assets, while the average cost of interest-bearing liabilities remained unchanged. The increase in the average yield of interest-earning assets was primarily due to increases in the average yield of investment securities and loans receivable, partly offset by decreases in the average yield on FHLB – San Francisco stock and interest-earning deposits.

Interest Income:

For the Quarters Ended March 31, 2020 and 2019.  Total interest income decreased by $703,000, or six percent, to $10.4 million for the third quarter of fiscal 2020 as compared to $11.1 million for the same quarter of fiscal 2019.  The decrease was primarily due to decreases in interest income from loans receivable, investment securities and interest-earning deposits.

Interest income on loans receivable (including loans held for sale in the third quarter of fiscal 2019) decreased by $389,000, or four percent, to $9.6 million in the third quarter of fiscal 2020 from $10.0 million in the same quarter of fiscal 2019. The decrease was due to a lower average yield, partly offset by a higher average balance. The average loans receivable yield during the third quarter of fiscal 2020 decreased 24 basis points to 4.14 percent from 4.38 percent during the same quarter last year. The decrease in the average yield on loans receivable was primarily attributable to loans repricing downward reflecting declines in the targeted Federal Funds Rate offset in part by the increase to $451,000 of net deferred loan costs that was recognized in interest income as a result of loan payoffs and scheduled amortizations in the third quarter of fiscal 2020 as compared to $179,000 of net deferred loan costs in the same quarter of fiscal 2019. The average balance of loans receivable increased by $14.5 million, or two percent, to $929.5 million for the third quarter of fiscal 2020 from $915.0 million in the same quarter of fiscal 2019, primarily due to a decrease in the average balance of loans held for sale attributable to the scaling back of saleable single-family mortgage loan originations, partly offset by an increase in the average balance of loans held for investment. 

The average balance of loans held for investment increased $54.0 million, or six percent, to $929.5 million during the third quarter of fiscal 2020 from $875.5 million in the same quarter of fiscal 2019. The average yield on the loans held for investment decreased by 22 basis points to 4.14 percent in the third quarter of fiscal 2020 from 4.36 percent in the same quarter of fiscal 2019. There were no loans held for sale in the third quarter of fiscal 2020 as compared to the average balance of $39.5 million with an average yield of 4.74 percent in the same quarter of fiscal 2019.

Interest income from investment securities decreased $114,000, or 19 percent, to $478,000 in the third quarter of fiscal 2020 from $592,000 for the same quarter of fiscal 2019. This decrease was attributable to a lower average balance, partly offset by a higher average yield. The average balance of investment securities decreased $23.3 million, or 23 percent, to $78.6 million in the third quarter of fiscal 2020 from $101.9 million in the same quarter of fiscal 2019. The decrease in the average balance of investment securities was primarily the result of scheduled and accelerated principal payments on mortgage-backed securities. The average investment securities yield increased 11 basis points to 2.43 percent in the third quarter of fiscal 2020 from 2.32 percent in the same quarter of fiscal 2019. The increase in the average investment securities yield was primarily attributable to a lower premium amortization between the quarters ($99,000 vs. $181,000), partly offset by the downward repricing of adjustable mortgage-backed securities.

51

The FHLB – San Francisco cash dividend received in the third quarter of fiscal 2020 was $144,000, unchanged from the same quarter of fiscal 2019. The average balance of FHLB – San Francisco stock in the third quarter of fiscal 2020 remained unchanged at $8.2 million as compared to the same quarter of fiscal 2019 and the average yield also remained unchanged at 7.03 percent in the third quarter of fiscal 2020 as compared to the same quarter last year.

Interest income from interest-earning deposits, primarily cash deposited at the Federal Reserve Bank of San Francisco, was $186,000 in the third quarter of fiscal 2020, down 52 percent from $386,000 in the same quarter of fiscal 2019. The decrease was primarily due to a lower average yield and, to a lesser extent, a lower average balance. The average yield earned on interest-earning deposits decreased 120 basis points to 1.20 percent in the third quarter of fiscal 2020 from 2.40 percent in the comparable quarter last year, due primarily to decreases in the targeted Federal Funds Rate over last year. The average balance of the interest-earning deposits in the third quarter of fiscal 2020 was $61.9 million, a decrease of $2.5 million or four percent, from $64.4 million in the same quarter of fiscal 2019.

For the Nine Months Ended March 31, 2020 and 2019.  Total interest income decreased by $844,000, or three percent, to $32.7 million for the first nine months of fiscal 2020 from $33.6 million in the same period of fiscal 2019.  The decrease was primarily due to decreases in interest income from loans receivable, interest-earning deposits and cash dividends received from FHLB – San Francisco stock, partly offset by an increase in interest income from investment securities.

Loans receivable interest income (including loans held for sale in the first nine months of fiscal 2019) decreased $499,000, or two percent, to $30.0 million in the first nine months of fiscal 2020 from $30.5 million for the same period of fiscal 2019.  The decrease was attributable to a lower average loan balance, partly offset by a higher average loan yield in the first nine months of fiscal 2020 in comparison to the same period last year.  The average balance of loans receivable decreased $19.1 million, or two percent, to $922.2 million for the first nine months of fiscal 2020 from $941.3 million in the same period of fiscal 2019. The average loan yield during the first nine months of fiscal 2020 increased two basis points to 4.34 percent from 4.32 percent in the same period last year. The increase in the average yield on loans receivable was primarily attributable to $623,000 of net deferred loan costs that were recognized in interest income as a result of loan payoffs and scheduled amortization and $48,000 of deferred interest payments that was recognized from one non-performing loan that was paid off in the first nine months of fiscal 2020 as compared to $823,000 of net deferred loan costs that were recognized in interest income as a result of loan payoffs and scheduled amortization and $176,000 of deferred interest payments that were recognized from three non-performing loans that were paid off in the same period last year.

The average balance of loans held for investment increased $39.9 million, or five percent, to $922.2 million during the first nine months of fiscal 2020 from $882.3 million in the same period of fiscal 2019. The average yield on the loans held for investment increased by four basis points to 4.34 percent in the first nine months of fiscal 2020 from 4.30 percent in the same period of fiscal 2019. There were no loans held for sale in the first nine months of fiscal 2020 as compared to the average balance of $59.0 million with an average yield of 4.71 percent in the same period of fiscal 2019.

Interest income from investment securities increased $278,000, or 20 percent, to $1.7 million in the first nine months of fiscal 2020 from $1.4 million for the same period of fiscal 2019. This increase was attributable to a higher average yield, partly offset by a lower average balance. The average investment securities yield increased 60 basis points to 2.53 percent in the first nine months of fiscal 2020 from 1.93 percent in the same period of fiscal 2019. The increase in the average investment securities yield was primarily attributable to a lower premium amortization between the periods ($326,000 vs. $692,000) and purchases of investment securities during the last 12 months which had higher average yields than the existing portfolio. The average balance of investment securities decreased $8.2 million, or nine percent, to $87.3 million in the first nine months of fiscal 2020 from $95.5 million in the same period of fiscal 2019. The decrease in the average balance of investment securities was primarily the result of scheduled and accelerated principal payments on mortgage-backed securities, partly offset by purchases of mortgage-backed securities.

52

The FHLB – San Francisco cash dividend received in the first nine months of fiscal 2020 was $432,000, down 24 percent from $565,000 in the same period of fiscal 2019, primarily attributable to a special cash dividend of $133,000 received in the first nine months of fiscal 2019 and not replicated in the same period of fiscal 2020. As a result, the average yield decreased to 7.03 percent in the first nine months of fiscal 2020 as compared to 9.19 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 $621,000 in the first nine months of fiscal 2020, down 44 percent from $1.1 million in the same period of fiscal 2019. The decrease was due to a lower average yield and, to a lesser extent, a lower average balance in the first nine months of fiscal 2020 as compared to the same period last year.  The average yield decreased 59 basis points to 1.61 percent in the first nine months of fiscal 2020 from 2.20 percent in the comparable period last year, due primarily to the decreases in the targeted Federal Funds Rate over last year. The average balance of the interest-earning deposits in the first nine months of fiscal 2020 was $50.6 million, a decrease of $15.9 million or 24 percent, from $66.5 million in the same period of fiscal 2019.

Interest Expense:

For the Quarters Ended March 31, 2020 and 2019.  Total interest expense remained virtually unchanged at $1.5 million, increasing $19,000 for the third quarter of fiscal 2020 as compared to the same quarter last year. This increase was attributable to higher borrowing expense, partly offset by lower deposit expense.

Interest expense on deposits for the third quarter of fiscal 2020 was $746,000 as compared to $841,000 for the same period last year, a decrease of $95,000, or 11 percent.  The decrease in interest expense on deposits was attributable to a lower average balance and a slightly lower average cost of deposits. The average balance of deposits decreased $36.4 million, or four percent, to $836.9 million during the quarter ended March 31, 2020 from $873.3 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 improved, decreasing by three basis points to 0.36 percent during the third quarter of fiscal 2020 from 0.39 percent during the same quarter last year.  The decrease in the average cost of deposits was attributable primarily to a lower percentage of time deposits to the total deposit balance and a two basis-point decrease in the average cost of time deposits. 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 2020 was 78 percent, compared to 75 percent in the same period of fiscal 2019.

Interest expense on borrowings, consisting primarily of FHLB – San Francisco advances, for the third quarter of fiscal 2020 increased $114,000, or 17 percent, to $794,000 from $680,000 for the same period last year.  The increase in interest expense on borrowings was the result of a higher average balance, partly offset by a lower average cost. The average balance of borrowings increased $25.3 million, or 24 percent, to $131.1 million during the quarter ended March 31, 2020 from $105.8 million during the same period last year. The average cost of borrowings decreased 17 basis points to 2.44 percent for the quarter ended March 31, 2020 from 2.61 percent in the same quarter last year. The decrease in the average cost of borrowings was primarily due to new long-term borrowings obtained during the first quarter of fiscal 2020 with a lower interest rate than the weighted average interest rate of all other borrowings.

For the Nine Months Ended March 31, 2020 and 2019.  Total interest expense decreased $155,000, or three percent, to $4.6 million in the first nine months of fiscal 2020 from $4.8 million in the same period last year. This decrease was attributable primarily to lower deposit expense, partly offset by higher borrowing expense.

Interest expense on deposits for the first nine months of fiscal 2020 was $2.3 million as compared to $2.6 million in the same period last year, a decrease of $315,000 or 12 percent.  The decrease in interest expense on deposits was primarily attributable to a lower average balance and, to a lesser extent, a lower average cost of deposits. The average balance of deposits decreased $54.9 million, or six percent, to $833.7 million during the nine months ended March 31, 2020 from $888.7 million during the same period last year. The decrease in the average balance was primarily attributable to a decrease in time deposits and, to a

53

lesser extent, savings deposits, partly offset by an increase in checking and money market deposits. The average cost of deposits decreased two basis points to 0.37 percent during the first nine months of fiscal 2020 from 0.39 percent during the same period last year. The decrease in the average cost of deposits was attributable primarily to a lower percentage of time deposits to the total deposit balance, partly offset by a two basis-point increase in the average cost of time deposits. The average balance of transaction accounts to total deposits in the first nine months of fiscal 2020 was 78 percent, compared to 74 percent in the same period of fiscal 2019.

Interest expense on borrowings, consisting primarily of FHLB – San Francisco advances, for the first nine months of fiscal 2020 increased $160,000, or seven percent, to $2.3 million from $2.2 million in the same period last year.  The increase in interest expense on borrowings was the result of a higher average balance, partly offset by a lower average cost. The average balance of borrowings increased by $12.2 million, or 11 percent, to $124.6 million during the nine months ended March 31, 2020 from $112.4 million during the same period last year, primarily due to the new long-term borrowings during the first quarter of fiscal 2020 at a lower average cost. The average cost of borrowings decreased eight basis points to 2.48 percent for the nine months ended March 31, 2020 from 2.56 percent in the same period last year.







54



The following tables present the average balance sheets for the quarter and nine months ended March 31, 2020 and 2019, respectively:

 

Average Balance Sheets
 
Quarter Ended
March 31, 2020
 
Quarter Ended
March 31, 2019
(Dollars In Thousands)
Average
Balance
Interest
Yield/
Cost
 
Average
Balance
Interest
Yield/
Cost
Interest-earning assets:
             
Loans receivable, net (1)
$
929,485
 
$
9,622
 
4.14
%
 
$
915,049
 
$
10,011
 
4.38
%
Investment securities
78,632
 
478
 
2.43
%
 
101,851
 
592
 
2.32
%
FHLB – San Francisco stock
8,199
 
144
 
7.03
%
 
8,199
 
144
 
7.03
%
Interest-earning deposits
61,900
 
186
 
1.20
%
 
64,390
 
386
 
2.40
%
               
Total interest-earning assets
1,078,216
 
10,430
 
3.87
%
 
1,089,489
 
11,133
 
4.09
%
               
Non interest-earning assets
31,942
       
30,228
     
               
Total assets
$
1,110,158
       
$
1,119,717
     
               
Interest-bearing liabilities:
             
Checking and money market accounts (2)
$
391,458
 
$
106
 
0.11
%
 
$
382,294
 
$
102
 
0.11
%
Savings accounts
260,124
 
131
 
0.20
%
 
274,400
 
139
 
0.21
%
Time deposits
185,273
 
509
 
1.10
%
 
216,558
 
600
 
1.12
%
               
Total deposits
836,855
 
746
 
0.36
%
 
873,252
 
841
 
0.39
%
               
Borrowings
131,075
 
794
 
2.44
%
 
105,793
 
680
 
2.61
%
               
Total interest-bearing liabilities
967,930
 
1,540
 
0.64
%
 
979,045
 
1,521
 
0.63
%
               
Non interest-bearing liabilities
18,442
       
17,991
     
               
Total liabilities
986,372
       
997,036
     
               
Stockholders’ equity
123,786
       
122,681
     
Total liabilities and stockholders’ equity
$
1,110,158
       
$
1,119,717
     
               
Net interest income
 
$
8,890
       
$
9,612
   
               
Interest rate spread (3)
   
3.23
%
     
3.46
%
Net interest margin (4)
   
3.30
%
     
3.53
%
Ratio of average interest-earning assets to
   average interest-bearing liabilities
   
111.39
%
     
111.28
%
Return (loss) on average assets
   
0.41
%
     
(0.05)
%
Return (loss) on average equity
   
3.70
%
     
(0.49)
%

(1)
Includes loans held for sale foe the quarter ended March 31, 2019 and non-performing loans, as well as net deferred loan cost amortization of $451 and $179 for the quarter ended March 31, 2020 and 2019, respectively. The average balance of loans held for sale was $0 and $39.5 million during the quarter ended March 31, 2020 and 2019, respectively.
(2)
Includes the average balance of non interest-bearing checking accounts of $85.6 million and $83.1 million during the quarter ended March 31, 2020 and 2019, 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 (recovery) for loan losses as a percentage of average interest-earning assets.

55

 
Nine Months Ended
March 31, 2020
 
Nine Months Ended
March 31, 2019
(Dollars In Thousands)
Average
Balance
Interest
Yield/
Cost
 
Average
Balance
Interest
Yield/
Cost
Interest-earning assets:
             
Loans receivable, net (1)
$
922,246
 
$
30,017
 
4.34
%
 
$
941,336
 
$
30,516
 
4.32
%
Investment securities
87,260
 
1,659
 
2.53
%
 
95,494
 
1,381
 
1.93
%
FHLB – San Francisco stock
8,199
 
432
 
7.03
%
 
8,199
 
565
 
9.19
%
Interest-earning deposits
50,642
 
621
 
1.61
%
 
66,498
 
1,111
 
2.20
%
               
Total interest-earning assets
1,068,347
 
32,729
 
4.08
%
 
1,111,527
 
33,573
 
4.03
%
               
Non interest-earning assets
31,815
       
30,711
     
               
Total assets
$
1,100,162
       
$
1,142,238
     
               
Interest-bearing liabilities:
             
Checking and money market accounts (2)
$
387,017
 
$
333
 
0.11
%
 
$
379,882
 
$
327
 
0.11
%
Savings accounts
259,143
 
396
 
0.20
%
 
281,814
 
437
 
0.21
%
Time deposits
187,571
 
1,571
 
1.11
%
 
226,978
 
1,851
 
1.09
%
               
Total deposits
833,731
 
2,300
 
0.37
%
 
888,674
 
2,615
 
0.39
%
               
Borrowings
124,577
 
2,318
 
2.48
%
 
112,363
 
2,158
 
2.56
%
               
Total interest-bearing liabilities
958,308
 
4,618
 
0.64
%
 
1,001,037
 
4,773
 
0.64
%
               
Non interest-bearing liabilities
19,262
       
19,306
     
               
Total liabilities
977,570
       
1,020,343
     
               
Stockholders’ equity
122,592
       
121,895
     
Total liabilities and stockholders’ equity
$
1,100,162
       
$
1,142,238
     
               
Net interest income
 
$
28,111
       
$
28,800
   
               
Interest rate spread (3)
   
3.44
%
     
3.39
%
Net interest margin (4)
   
3.51
%
     
3.45
%
Ratio of average interest-earning assets to
   average interest-bearing liabilities
   
111.48
%
     
111.04
%
Return on average assets
   
0.74
%
     
0.42
%
Return on average equity
   
6.64
%
     
3.97
%

(1)
Includes loans held for sale for the nine months ended March 31, 2019 and non-performing loans, as well as net deferred loan cost amortization of $623 and $823 for the nine months ended March 31, 2020 and 2019, respectively. The average balance of loans held for sale was $0 and $59.0 million during the nine months ended March 31, 2020 and 2019, respectively.
(2)
Includes the average balance of non interest-bearing checking accounts of $83.7 million and $82.7 million during the nine months ended March 31, 2020 and 2019, 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 (recovery) for loan losses as a percentage of average interest-earning assets.

56

The following tables set forth the effects of changing rates and volumes on interest income and expense for the quarter and nine months ended March 31, 2020 and 2019, 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, 2020 Compared
To Quarter Ended March 31, 2019
Increase (Decrease) Due to
(In Thousands)
Rate
Volume
Rate/
Volume
Net
Interest-earning assets:
       
     Loans receivable (1)
$
(538
)
$
158
 
$
(9
)
$
(389
)
     Investment securities
27
 
(135
)
(6
)
(114
)
     FHLB – San Francisco stock
 
 
 
 
     Interest-earning deposits
(192
)
(15
)
7
 
(200
)
Total net change in income on interest-earning assets
(703
)
8
 
(8
)
(703
)
         
Interest-bearing liabilities:
       
     Checking and money market accounts
 
4
 
 
4
 
     Savings accounts
(7
)
(1
)
 
(8
)
     Time deposits
(6
)
(87
)
2
 
(91
)
     Borrowings
(40
)
165
 
(11
)
114
 
Total net change in expense on interest-bearing liabilities
(53
)
81
 
(9
)
19
 
Net (decrease) increase in net interest income
$
(650
)
$
(73
)
$
1
 
$
(722
)

(1)
Includes loans held for sale for the quarter ended March 31, 2019 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.





57

 
Nine Months Ended March 31, 2020 Compared
To Nine Months Ended March 31, 2019
Increase (Decrease) Due to
(In Thousands)
Rate
Volume
Rate/
Volume
Net
Interest-earning assets:
       
     Loans receivable (1)
$
123
 
$
(619
)
$
(3
)
$
(499
)
     Investment securities
434
 
(119
)
(37
)
278
 
     FHLB – San Francisco stock
(133
)
 
 
(133
)
     Interest-bearing deposits
(298
)
(262
)
70
 
(490
)
Total net change in income on interest-earning assets
126
 
(1,000
)
30
 
(844
)
         
Interest-bearing liabilities:
       
     Checking and money market accounts
 
6
 
 
6
 
     Savings accounts
(7
)
(36
)
2
 
(41
)
     Time deposits
34
 
(308
)
(6
)
(280
)
     Borrowings
(69
)
236
 
(7
)
160
 
Total net change in expense on interest-bearing liabilities
(42
)
(102
)
(11
)
(155
)
Net increase (decrease) in net interest income
$
168
 
$
(898
)
$
41
 
$
(689
)

(1)
Includes loans held for sale for the nine months ended March 31, 2019 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, 2020 and 2019.  During the third quarter of fiscal 2020, the Corporation recorded a provision for loan losses of $874,000, as compared to a provision of $4,000 in the same period of fiscal 2019.  The increase in provision for loan losses during this quarter was primarily attributable to a qualitative component established in our allowance for loan losses methodology in response to the deteriorating economic conditions and probable loan losses driven by the impact of COVID-19 pandemic on the U.S. and global economies.  Non-performing loans, net of the allowance for loan losses and fair value adjustments decreased 42 percent to $3.6 million at March 31, 2020 from $6.2 million at June 30, 2019 and $6.1 million at March 31, 2019. Net loan recoveries in the third quarter of fiscal 2020 were $15,000 or 0.01 percent (annualized) of average loans receivable, unchanged from the same quarter of fiscal 2019. Total classified loans, net of the allowance for loan losses and fair value adjustments, were $15.1 million at March 31, 2020 as compared to $16.2 million at June 30, 2019 and $14.8 million at March 31, 2019. Classified loans net of the allowance for loan losses and fair value adjustments at March 31, 2020 were comprised of $11.4 million of loans in the special mention category and $3.7 million of loans in the substandard category as compared to $8.6 million of loans in the special mention category and $7.6 million of loans in the substandard category at June 30, 2019.

For the Nine Months Ended March 31, 2020 and 2019.  During the first nine months of fiscal 2020, the Corporation recorded a provision for loan losses of $671,000, as compared to a recovery of $450,000 in the same period of fiscal 2019. The provision for loan losses in the first nine months of fiscal 2020 was primarily attributable to a qualitative component established in our allowance for loan losses methodology in response to the deteriorating economic conditions and probable loan losses driven by the impact of COVID-19 pandemic on the U.S. and global economies. Net loan recoveries in the first nine months of fiscal 2020 were $63,000 or 0.01 percent (annualized) of average loans receivable, as compared to net loan recoveries of $145,000 or 0.02 percent (annualized) of average loans receivable in the same period of fiscal 2019.

58

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.  See related discussion of “Asset Quality.”

At March 31, 2020, the allowance for loan losses was $7.8 million, comprised of collectively evaluated allowances of $7.7 million and individually evaluated allowances of $51,000; in comparison to the allowance for loan losses of $7.1 million at June 30, 2019, comprised of collectively evaluated allowances of $7.0 million and individually evaluated allowances of $130,000. The allowance for loan losses as a percentage of gross loans held for investment was 0.85 percent at March 31, 2020 as compared to 0.80 percent at June 30, 2019. 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 5 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements. A further decline in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Corporation’s financial condition and results of operations.

Non-Interest Income:

For the Quarters Ended March 31, 2020 and 2019.  Total non-interest income decreased $2.0 million, or 64 percent, to $1.1 million for the quarter ended March 31, 2020 from $3.1 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 $1.7 million, or 99 percent, to a net gain of $14,000 for the third quarter of fiscal 2020 from a net gain of $1.7 million in the same quarter of fiscal 2019. The net gain in the third quarter of fiscal 2020 was primarily attributable to an accrual recovery of loan sale premium refunds from the early payoff of loans previously sold. There was no loan sale volume in the third quarter of fiscal 2020 consistent with the Corporation’s scaling back of the origination of saleable single-family mortgage loans, as compared to $95.8 million in the quarter ended March 31, 2019 with an average loan sale margin of 1.79 percent.

For the Nine Months Ended March 31, 2020 and 2019.  Total non-interest income decreased $7.7 million, or 69 percent, to $3.5 million for the nine months ended March 31, 2020 from $11.2 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 $7.2 million, or 102 percent, to a net loss of $115,000 for the first nine months of fiscal 2020 from a net gain of $7.1 million in the same period of fiscal 2019.  The net loss in the first nine months of fiscal 2020 was primarily attributable to loan sale premium refunds from the early payoff of loans previously sold. There was no loan sale volume in the first nine months of fiscal 2020, as compared to $408.9 million during the nine months ended March 31, 2019 with an average loan sale margin of 1.73 percent.

Non-Interest Expense:

For the Quarters Ended March 31, 2020 and 2019.  Total non-interest expense in the quarter ended March 31, 2020 was $7.5 million, a decrease of $5.5 million, or 42 percent, as compared to $13.0 million in the quarter ended March 31, 2019. The decrease was primarily attributable to scaling back the origination of saleable single-family mortgage loans resulting in significant reductions in salaries and employee benefits expenses due to lower incentive compensation and staff reductions and lower premises and occupancy expenses due to the closing of loan production offices, as well as reductions in other related expenses.

59

Salaries and employee benefits expense decreased $4.3 million, or 47 percent, to $5.0 million in the third quarter of fiscal 2020 from $9.3 million in the same period of fiscal 2019. The decrease was due primarily to lower salaries and employee benefits expenses resulting from fewer employees and incentive payments consistent with the scaling back of saleable single-family mortgage loan originations. The salaries and employee benefits expense in the third quarter of fiscal 2019 includes approximately $4.3 million of salaries and employee benefits expenses related to the staffing associated with saleable single-family loan originations, which includes $1.5 million of one-time costs associated with staff reductions. Total loan originations and purchases decreased $125.9 million, or 81 percent, to $28.8 million in the third quarter of fiscal 2020 from $154.7 million in the same quarter of fiscal 2019. Total full-time equivalent employees (“FTE”) were 183 at March 31, 2020, down 115 FTE or 39 percent from 298 FTE at March 31, 2019.

Premises and occupancy expenses decreased $441,000, or 34 percent, to $845,000 in the third quarter of fiscal 2020 from $1.3 million in the same quarter of fiscal 2019.  The decrease in premises and occupancy expenses was due primarily to the closure of 10 loan production offices and one retail banking center.

Other non-interest expenses decreased $324,000, or 29 percent, to $798,000 in the third quarter of fiscal 2020 from $1.1 million in the same quarter of fiscal 2019. The decrease in other non-interest expenses was primarily attributable to lower loan origination expenses consistent with the scaling back of saleable single-family loan originations.

For the Nine Months Ended March 31, 2020 and 2019.  Total non-interest expense in the nine months ended March 31, 2020 was $22.3 million, a decrease of $13.3 million or 37 percent, as compared to $35.6 million in the same period ended March 31, 2019.  The decrease was primarily due to decreases in salaries and employee benefits expense, premises and occupancy expenses and other non-interest expense.

Salaries and employee benefits expense decreased $9.8 million, or 40 percent, to $15.0 million in the first nine months of fiscal 2020 from $24.8 million in the same period of fiscal 2019. The decrease was due primarily to lower salaries and employee benefits expenses resulting from fewer employees and incentive payments consistent with the scaling back of saleable single-family mortgage loan originations. The salaries and employee benefits expense in the first nine months of fiscal 2019 includes approximately $10.6 million of salaries and employee benefits expenses related to the staffing associated with saleable single-family loan originations, which includes $1.5 million of one-time costs associated with staff reductions. Total loan originations and purchases decreased $369.5 million, or 64 percent, to $203.9 million in the first nine months of fiscal 2020 from $573.4 million in the comparable period of fiscal 2019.

Premises and occupancy expenses decreased $1.3 million, or 33 percent, to $2.6 million in the first nine months of fiscal 2020 from $3.9 million in the same period of fiscal 2019.  Equipment expense decreased $478,000, or 36 percent, to $855,000 in the first nine months of fiscal 2020 from $1.3 million in the same period of fiscal 2019.  The decrease in both premises and occupancy expenses and equipment expense was due primarily to the closure of 10 loan production offices and one retail banking center.

Deposit insurance premiums and regulatory assessments decreased $364,000, or 79 percent, to $97,000 in the first nine months of fiscal 2020 from $461,000 in the same period of fiscal 2019. The decrease was due primarily to a small bank assessment credit awarded by the FDIC in September 2019 which reduced assessment fees for the first nine months of fiscal 2020.

Other non-interest expenses decreased $892,000, or 29 percent, to $2.2 million in the first nine months of fiscal 2020 from $3.1 million in the same period of fiscal 2019. The decrease in other non-interest expenses was primarily attributable to lower loan origination expenses consistent with the scaling back of saleable single-family loan originations. In addition, a $296,000 partial reversion of a previously recognized legal settlement (see Part II, Item 1- Legal Proceedings) was recorded during the nine months ended March 31, 2020.


60

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, 2020 and 2019.  The Corporation’s income tax provision was $467,000 for the third quarter of fiscal 2020, in contrast to an income tax benefit of $189,000 in the same quarter last year. The effective income tax rate for the quarter ended March 31, 2020 was 28.97% and the effective income tax benefit for the quarter ended March 31, 2019 was 55.59%. The Corporation believes that the effective income tax rate applied in the third quarter of fiscal 2020 reflects its current income tax obligations.

For the Nine Months Ended March 31, 2020 and 2019.  The Corporation’s provision for income taxes was $2.6 million for the first nine months of fiscal 2020, up 106 percent from the $1.2 million provision for income taxes in the same period last year. The increase was attributable to higher income before income taxes in the first nine months of fiscal 2020 in comparison to the same period last year. The effective income tax rate for the nine months ended March 31, 2020 and 2019 was 29.49% and 25.42%, respectively. The Corporation believes that the effective income tax rate applied in the first nine months of fiscal 2020 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, was $3.6 million at March 31, 2020, down 42 percent from $6.2 million at June 30, 2019. Non-performing loans as a percentage of loans held for investment at March 31, 2020 was 0.40%, improving from 0.71% at June 30, 2019.  The non-performing loans at March 31, 2020 are comprised of 16 single-family loans ($3.6 million) and one commercial business loan ($34,000).  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, 2020, total restructured loans decreased $2.0 million, or 53 percent, to $1.8 million from $3.8 million at June 30, 2019.  At March 31, 2020 and June 30, 2019, $1.8 million and $1.9 million of these restructured loans were classified as non-performing, respectively.  As of March 31, 2020, $683,000, or 39 percent, of the restructured loans have a current payment status, consistent with their modified payment terms; this compares to $2.4 million, or 63 percent, of restructured loans that had a current payment status, consistent with their modified payment terms as of June 30, 2019.

There was no real estate owned at both March 31, 2020 and June 30, 2019.

Non-performing assets, which includes non-performing loans and real estate owned, if any, decreased $2.6 million or 42 percent to $3.6 million or 0.33 percent of total assets at March 31, 2020 from $6.2 million or 0.57 percent of total assets at June 30, 2019. 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 5 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements.

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

61

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, the value of the real estate collateral securing the Corporation’s loans as set forth in the table could be significantly overstated.  The Corporation’s ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished and it would be more likely to suffer losses on defaulted loans.  The Corporation generally does not update the loan-to-value ratio (“LTV”) on its loans held for investment by obtaining new appraisals or broker price opinions (nor does the Corporation intend to do so in the future as a result of the costs and inefficiencies associated with completing the task) unless a specific loan has demonstrated deterioration or the Corporation receives a loan modification request from a borrower (in which case individually evaluated allowances are established, if required).

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,
2020
At June 30,
2019
Loans on non-accrual status (excluding restructured loans):
   
Mortgage loans:
   
      Single-family
$
1,875
 
$
3,315
 
      Construction
 
971
 
      Total
1,875
 
4,286
 
     
Accruing loans past due 90 days or more
 
 
     
Restructured loans on non-accrual status:
   
Mortgage loans:
   
      Single-family
1,726
 
1,891
 
Commercial business loans
34
 
41
 
      Total
1,760
 
1,932
 
     
Total non-performing loans
3,635
 
6,218
 
     
Real estate owned, net
 
 
Total non-performing assets
$
3,635
 
$
6,218
 
     
Non-performing loans as a percentage of loans held for investment, net
   of allowance for loan losses
0.40
%
0.71
%
     
Non-performing loans as a percentage of total assets
0.33
%
0.57
%
     
Non-performing assets as a percentage of total assets
0.33
%
0.57
%


62

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, if any, at the dates indicated:
 
At March 31,
2020
 
At June 30,
2019
(Dollars In Thousands)
Balance
Count
 
Balance
Count
Special mention loans:
         
Mortgage loans:
         
      Single-family
$
5,954
 
15
   
$
3,795
 
13
 
      Multi-family
3,799
 
3
   
3,864
 
3
 
      Commercial real estate
 
   
927
 
1
 
      Construction
1,671
 
1
   
 
 
         Total special mention loans
11,424
 
19
   
8,586
 
17
 
           
Substandard loans:
         
Mortgage loans:
         
      Single-family
3,601
 
18
   
6,631
 
23
 
      Construction
 
   
971
 
1
 
Commercial business loans
34
 
1
   
41
 
1
 
         Total substandard loans
3,635
 
19
   
7,643
 
25
 
           
Total classified loans
15,059
 
38
   
16,229
 
42
 
           
Real estate owned
 
   
 
 
           
Total classified assets
$
15,059
 
38
   
$
16,229
 
42
 


63

Loan Volume Activities

The following table is provided to disclose details related to the volume of loans originated, purchased and sold for the quarter and nine months indicated:
 
For the Quarters Ended
March 31,
For the Nine Months Ended
March 31,
(In Thousands)
2020
2019
2020
2019
Loans originated for sale:
       
   Retail originations
$
 
$
72,353
 
$
 
$
287,399
   
   Wholesale originations
 
38,353
 
 
166,045
   
      Total loans originated for sale
 
110,706
 
 
453,444
   
           
Loans sold:
         
   Servicing released
 
(134,264
)
 
(510,798
)
 
   Servicing retained
 
(2,409
)
 
(5,193
)
 
      Total loans sold
 
(136,673
)
 
(515,991
)
 
           
Loans originated for investment:
         
   Mortgage loans:
         
        Single-family
9,654
 
6,862
 
25,221
 
48,258
   
        Multi-family
10,390
 
9,523
 
44,661
 
27,678
   
        Commercial real estate
5,570
 
4,040
 
14,468
 
12,520
   
        Construction
774
 
1,970
 
3,983
 
5,313
   
   Consumer loans
 
 
1
 
   
      Total loans originated for investment
26,388
 
22,395
 
88,334
 
93,769
   
           
Loans purchased for investment:
         
   Mortgage loans:
         
        Single-family
 
8,426
 
70,733
 
8,426
   
        Multi-family
2,460
 
4,622
 
44,829
 
16,645
   
        Commercial real estate
 
1,157
 
 
1,157
   
      Total loans purchased for investment
2,460
 
21,606
 
115,562
 
26,228
   
           
Mortgage loan principal payments
(55,685
)
(36,456
)
(171,719
)
(140,548
)
 
(Decrease) increase in other items, net (1)
(585
)
(499
)
2,205
 
(1,831
)
 
           
Net (decrease) increase in loans held for investment and loans
  held for sale at fair value
$
(27,422
)
$
(18,921
)
$
34,382
 
$
(84,929
)
 

(1)
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.

Liquidity and Capital Resources

The Corporation’s primary sources of funds are deposits, 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


64

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.  During the first nine months of fiscal 2020 and 2019, the Corporation originated and purchased loans held for investment of $203.9 million and $120.0 million, respectively. At March 31, 2020, the Corporation had loan origination commitments totaling $3.4 million, undisbursed lines of credit totaling $1.4 million and undisbursed construction loan funds totaling $5.5 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 2020, the net decrease in deposits was $5.4 million or one percent, primarily due to a decrease in time deposits. Time deposits decreased $7.5 million, or four percent, to $185.6 million at March 31, 2020 from $193.1 million at June 30, 2019.  At March 31, 2020, time deposits with a principal amount of $250,000 or less and scheduled to mature in one year or less were $74.5 million and total time deposits with a principal amount of more than $250,000 and scheduled to mature in one year or less were $27.2 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, 2020, total cash and cash equivalents were $84.3 million, or eight 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, 2020, total borrowings were $131.1 million and the financing availability at FHLB – San Francisco was limited to 35 percent of total assets; the remaining borrowing facility available was $244.1 million and the remaining available collateral was $389.9 million. In addition, the Bank has secured a $47.4 million discount window facility at the Federal Reserve Bank of San Francisco, collateralized by investment securities with a fair market value of $50.4 million. As of March 31, 2020, 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, 2020 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, 2020.

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, 2020 decreased to 14.8 percent from 20.7 percent for the quarter ended June 30, 2019.

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, 2020, the Bank exceeded all regulatory capital requirements.  The Bank was categorized "well-capitalized" at March 31, 2020 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.


65

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, 2020
                           
Tier 1 leverage capital (to adjusted average assets)
$
114,967
   
 10.36
%
   
$
44,398
   
4.00
%
   
$
55,498
   
5.00
%
 
CET1 capital (to risk-weighted assets)
$
114,967
   
17.26
%
   
$
46,624
   
7.00
%
   
$
43,294
   
6.50
%
 
Tier 1 capital (to risk-weighted assets)
$
114,967
   
17.26
%
   
$
56,615
   
8.50
%
   
$
53,285
   
8.00
%
 
Total capital (to risk-weighted assets)
$
122,867
   
18.45
%
   
$
69,936
   
10.50
%
   
$
66,606
   
10.00
%
 
                             
As of June 30, 2019
                           
Tier 1 leverage capital (to adjusted average assets)
$
115,009
   
10.50
%
   
$
43,824
   
4.00
%
   
$
54,779
   
5.00
%
 
CET1 capital (to risk-weighted assets)
$
115,009
   
18.00
%
   
$
44,730
   
7.00
%
   
$
41,535
   
6.50
%
 
Tier 1 capital (to risk-weighted assets)
$
115,009
   
18.00
%
   
$
54,314
   
8.50
%
   
$
51,119
   
8.00
%
 
Total capital (to risk-weighted assets)
$
122,225
   
19.13
%
   
$
67,094
   
10.50
%
   
$
63,899
   
10.00
%
 

(1)
The dollar amounts and ratios include the capital conservation buffer consisting of 2.50% of risk-weighted assets above the required minimum levels at March 31, 2020 and June 30, 2019 for CET1 capital, Tier 1 capital and Total capital.

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. At March 31, 2020, the Bank was in compliance with this requirement.

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 2020, 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,
2020
At
June 30,
2019
At
March 31,
2019
       
Loans serviced for others (in thousands)
$94,948
$120,236
$123,049
       
Book value per share
$16.56
$16.12
$16.17


66

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.  In addition, the Corporation maintains an investment portfolio, which is largely in U.S. government agency MBS and U.S. government sponsored enterprise MBS with contractual maturities of up to 30 years that reprice frequently or have a relatively short-average life.  The Corporation relies on retail deposits as its primary source of funds while utilizing FHLB – San Francisco advances as a secondary source of funding.  Management believes retail deposits, unlike brokered deposits, reduces the effects of interest rate fluctuations because they generally represent a more stable source of funds.  As part of its interest rate risk management strategy, the Corporation promotes transaction accounts and time deposits with terms up to seven years.

Through the use of an internal interest rate risk model, the Corporation is able to analyze its interest rate risk exposure by measuring the change in net portfolio value (“NPV”) over a variety of interest rate scenarios.  NPV is defined as the net present value of expected future cash flows from assets, liabilities and off-balance sheet contracts.  The calculation is intended to illustrate the change in NPV that would occur in the event of an immediate change in interest rates of  -100, +100, +200 and +300 basis points (“bp”) with no effect given to steps that management might take to counter the effect of the interest rate movement. As of March 31, 2020, the targeted Federal Funds Rate range was 0.00% to 0.25%, making an immediate change of -200 basis points or more improbable.

The following table is derived from the internal interest rate risk model and represents the NPV based on the indicated changes in interest rates as of March 31, 2020 (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)
+300 bp
$
 241,011
 
$
        105,599
 
$
 1,223,404
 
19.70%
    +777 bp
+200 bp
$
 213,906
 
$
          78,494
 
$
 1,201,918
 
17.80%
   +587 bp
+100 bp
$
 182,268
 
$
          46,856
 
$
 1,176,074
 
15.50%
   +357 bp
      0 bp
$
 135,412
 
$
 
$
 1,135,193
 
11.93%
      0 bp
-100 bp
$
 127,070
 
$
(8,342
)
$
 1,125,416
 
11.29%
   -64 bp

(1)
Represents the increase (decrease) of the NPV at the indicated interest rate change in comparison to the NPV at March 31, 2020 (“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, 2020 and June 30, 2019.
 
At March 31, 2020
At June 30, 2019
 
(-100 bp rate shock)
(-100 bp rate shock)
Pre-Shock NPV Ratio: NPV as a % of PV Assets
             11.93%
11.80%
Post-Shock NPV Ratio: NPV as a % of PV Assets
             11.29%
10.67%
Sensitivity Measure: Change in NPV Ratio
            -64 bp
-113 bp

67

The pre-shock NPV ratio increased 13 basis points to 11.93 percent at March 31, 2020 from 11.80 percent at June 30, 2019 and the post-shock NPV ratio increased 62 basis points to 11.29 percent at March 31, 2020 from 10.67 percent at June 30, 2019.  The increase of the NPV ratios was primarily attributable to net income in the first nine months of fiscal 2020 and the change in interest rates, partly offset by a $7.5 million cash dividend distribution from the Bank to Provident Financial Holdings, Inc. in September 2019.

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.  Accordingly, the data presented in the tables in this section should not be relied upon as indicative of actual results in the event of changes in interest rates.  Furthermore, the NPV presented in the foregoing tables is not intended to present the fair market value of the Corporation, nor does it represent amounts that would be available for distribution to shareholders in the event of the liquidation of the Corporation.

The Corporation measures and evaluates the potential effects of interest rate movements through an interest rate sensitivity "gap" analysis.  Interest rate sensitivity reflects the potential effect on net interest income when there is movement in interest rates. For loans, securities and liabilities with contractual maturities, the table presents 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.



68

The following table represents the interest rate gap analysis of the Corporation's assets and liabilities as of March 31, 2020:
     
Term to Contractual Repricing, Estimated Repricing, or Contractual
Maturity (1)
     
As of March 31, 2020
(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
$
78,704
 
$
 
$
 
$
5,546
 
$
84,250
 
 
Investment securities
23,996
 
 
 
50,314
 
74,310
 
 
Loans held for investment
282,877
 
234,992
 
296,946
 
99,492
 
914,307
 
 
FHLB - San Francisco stock
8,199
 
 
 
 
8,199
 
 
Other assets
3,292
 
 
 
23,209
 
26,501
 
   
Total assets
397,068
 
234,992
 
296,946
 
178,561
 
1,107,567
 
               
Repricing Liabilities and Equity:
         
 
Checking deposits - non-interest bearing
 
 
 
86,585
 
86,585
 
 
Checking deposits - interest bearing
40,558
 
81,117
 
81,117
 
67,597
 
270,389
 
 
Savings deposits
52,332
 
104,664
 
104,663
 
 
261,659
 
 
Money market deposits
15,788
 
15,787
 
 
 
31,575
 
 
Time deposits
101,667
 
63,055
 
20,102
 
799
 
185,623
 
 
Borrowings
20,000
 
51,063
 
50,007
 
10,000
 
131,070
 
 
Other liabilities
339
 
 
 
17,169
 
17,508
 
 
Stockholders' equity
 
 
 
123,158
 
123,158
 
   
Total liabilities and stockholders' equity
230,684
 
315,686
 
255,889
 
305,308
 
1,107,567
 
               
Repricing gap positive (negative)
$
166,384
 
$
(80,694
)
$
41,057
 
$
(126,747
)
$
 
Cumulative repricing gap:
         
 
Dollar amount
$
166,384
 
$
85,690
 
$
126,747
 
$
 
$
 
 
Percent of total assets
15
%
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); FHLB - San Francisco stock is presented as contractual repricing; transaction accounts (checking, savings and money market deposits) are presented as estimated 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 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.

69

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;
Forecast 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, 2020 and June 30, 2019.
At March 31, 2020
 
At June 30, 2019
Basis Point (bp)
Change in Rates
Change in
Net Interest Income
 
Basis Point (bp)
Change in Rates
Change in
Net Interest Income
+300 bp
6.84%
 
+300 bp
6.85%
+200 bp
2.43%
 
+200 bp
4.39%
+100 bp
(1.15)%
 
+100 bp
2.36%
 -100 bp
(2.43)%
 
-100 bp
(3.63)%

At March 31, 2020 and June 30, 2019, 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 (except under the +100 basis point shock scenario at March 31, 2020).  In a falling interest rate environment, the results project a decrease in net interest income over the subsequent 12-month period.

Management believes that the assumptions used to complete the analysis described in the table above are reasonable.  However, past experience has shown that immediate, permanent and parallel movements in interest rates will not necessarily occur.  Additionally, while the analysis provides a tool to evaluate the projected net interest income to changes in interest rates, actual results may be substantially different if actual experience differs from the assumptions used to complete the analysis, particularly with respect to the 12-month business plan when asset growth is forecast.  Therefore, the model results that the 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.

70

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, 2020 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, 2020, that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.  The Corporation does not expect that its internal control over financial reporting will prevent all error and all fraud.  A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met.  Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any control procedure is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.


PART II – OTHER INFORMATION

Item 1.  Legal Proceedings.

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, 2019, except as follows.

On July 24, 2019, the California Superior Court for the County of San Bernardino, California granted final approval of the settlement in the Cannon vs. Bank lawsuit. On July 26, 2019, the final order was signed by this court and on August 6, 2019, the Bank forwarded the settlement amount to the class administrator. The total settlement was reduced to $2.5 million from $2.8 million, resulting in a $296,000 settlement expense recovery which was recognized in the first quarter of fiscal 2020.

71

Item 1A.  Risk Factors.

In light of recent developments relating to Coronavirus Disease 2019 (“COVID-19”), the Corporation is supplementing its risk factors contained in Item 1A of its Annual Report on Form 10-K for the year ended June 30, 2019, as filed with the Securities and Exchange Commission on August 30, 2019. The following risk factor should be read in conjunction with the risk factors described in the Annual Report on Form 10-K for the year ended June 30, 2019.

The COVID-19 pandemic has adversely impacted our ability to conduct business and is expected to adversely impact our financial results and those of our customers. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic has significantly adversely affected our operations and the way we provide banking services to businesses and individuals, most of whom are currently under government issued stay-at-home orders.  As an essential business, we continue to provide banking and financial services to our customers with in-person and drive-thru access available at the majority of our branch locations. In addition, we continue to provide access to banking and financial services through online banking, ATMs and by telephone. If the COVID-19 pandemic worsens it could limit or disrupt our ability to provide banking and financial services to our customers.

In response to the stay-at-home orders, some of our employees currently are working remotely to enable us to continue to provide banking services to our customers.  Heightened cybersecurity, information security and operational risks may result from these remote work-from-home arrangements. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of the COVID-19 pandemic.  We also rely upon our third-party vendors to conduct business and to process, record and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our customers. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.

There is pervasive uncertainty surrounding the future economic conditions that will emerge in the months and years following the start of the pandemic. As a result, management is confronted with a significant and unfamiliar degree of uncertainty in estimating the impact of the pandemic on credit quality, revenues and asset values. To date, the COVID-19 pandemic has resulted in declines in loan demand and loan originations, deposit availability, market interest rates and negatively impacted many of our business and consumer borrower’s ability to make their loan payments. Because the length of the pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including recent reductions in the targeted Federal Funds Rate, until the pandemic subsides, we expect our net interest income and net interest margin will be adversely affected in the near term, if not longer. Many of our borrowers have become unemployed or may face unemployment, and certain businesses are at risk of insolvency as their revenues decline precipitously, especially in businesses related to travel, hospitality, leisure and physical personal services. Businesses may ultimately not reopen as there is a significant level of uncertainty regarding the level of economic activity that will return to our markets over time, the impact of governmental assistance, the speed of economic recovery, the resurgence of COVID-19 in subsequent seasons and changes to demographic and social norms that will take place.

The impact of the pandemic is expected to continue to adversely affect us during 2020 and possibly longer as the ability of many of our customers to make loan payments has been significantly affected. Although the Corporation makes estimates of loan losses related to the pandemic as part of its evaluation of the allowance for loan losses, such estimates involve significant judgment and are made in the context of significant uncertainty as to the impact the pandemic will have on the credit quality of our loan portfolio. It is likely that increased loan delinquencies, adversely classified loans and loan charge-offs will increase in the future as a result of the pandemic.  Consistent with guidance provided by banking regulators, we have modified loans by providing various loan payment deferral options to our borrowers affected by the COVID-19 pandemic. Notwithstanding these modifications, these borrowers may not be able to resume making full payments on their loans once the COVID-19 pandemic is

72

resolved. Any increases in the allowance for credit losses will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.

Even after the COVID-19 pandemic subsides, the U.S. economy will likely require some time to recover from its effects, the length of which is unknown, and during which we may experience a recession. As a result, we anticipate our business may be materially and adversely affected during this recovery. To the extent the effects of the COVID-19 pandemic adversely impact our business, financial condition, liquidity or results of operations, it may also have the effect of heightening many of the other risks described in the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended June 30, 2019 and any subsequent Quarterly Reports on Form 10-Q.


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 2020.
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, 2020
1,263
 
$
22.13
1,263
 
300,453
 
February 1 – 29, 2020
20,148
 
$
21.28
20,148
 
280,305
 
March 1 – 31, 2020
25,345
 
$
16.95
25,345
 
254,960
 
Total
46,756
 
$
18.95
46,756
 
254,960
 

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

During the quarter ended March 31, 2020, the Corporation purchased 46,756 shares of the Corporation’s common stock at an average cost of $18.95 per share. For the nine months ended March 31, 2020, the Corporation purchased 66,041 shares of the Corporation’s common stock at an average cost of $19.43 per share. As of March 31, 2020, a total of 118,040 shares or 32 percent of the shares authorized in the April 2018 stock repurchase plan were purchased at an average cost of $19.57 per share, leaving 254,960 shares available for purchase until the plan expires on April 26, 2020. During the quarter ended March 31, 2020, there were no stock options or restricted stock activity. For the nine months ended March 31, 2020, a total of 16,250 shares of stock options were exercised and a total of 8,000 shares of restricted stock were forfeited, while no shares of restricted stock vested. The Corporation did not purchase any shares from recipients to fund their withholding tax obligations in the third quarter and first nine months of fiscal 2020. During the quarter and nine months ended March 31, 2020, 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.


73

Item 5.  Other Information.

Not applicable.

Item 6.  Exhibits.

Exhibits:
   
   
4.1
Form of Certificate of Provident's Common Stock (incorporated by reference to the Corporation’s Registration Statement on Form S-1 (333-2230) filed on March 11, 1996))
   
   
   
   
   
101
The following materials from the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, 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 (Loss); (4) Condensed Consolidated Statements of Stockholders’ Equity; (5) Condensed Consolidated Statements of Cash Flows; and (6) Selected Notes to Condensed Consolidated Financial Statements.
   




74


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 8, 2020
/s/ Craig G. Blunden
 
Craig G. Blunden
 
Chairman and Chief Executive Officer
(Principal Executive Officer)
   
   
   
Date: May 8, 2020
/s/ Donavon P. Ternes
 
Donavon P. Ternes
 
President, Chief Operating Officer and
Chief Financial Officer
(Principal Financial and Accounting Officer)







75