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Section 1: 10-Q (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
September 30, 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 [   ] 
 
Non-accelerated filer [X]
 
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 October 30, 2020 there were 7,442,254 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 September 30, 2020 and June 30, 2020
1
 
Condensed Consolidated Statements of Operations
 
   
for the Quarter ended September 30, 2020 and 2019
2
 
Condensed Consolidated Statements of Comprehensive Income
 
   
for the Quarter ended September 30, 2020 and 2019
3
 
Condensed Consolidated Statements of Stockholders’ Equity
 
   
for the Quarter ended September 30, 2020 and 2019
4
 
Condensed Consolidated Statements of Cash Flows
 
   
for the Three Months ended September 30, 2020 and 2019
5
 
Notes to Unaudited Interim Condensed Consolidated Financial Statements
6
       
ITEM 2  -
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
 
       
 
General
35
 
Safe-Harbor Statement
36
 
Critical Accounting Policies
37
 
Executive Summary and Operating Strategy
37
 
Off-Balance Sheet Financing Arrangements
40
 
Comparison of Financial Condition at September 30, 2020 and June 30, 2020
40
 
Comparison of Operating Results
for the Quarter ended September 30, 2020 and 2019
42
 
Asset Quality
48
 
Loan Volume Activities
51
 
Liquidity and Capital Resources
51
 
Supplemental Information
53
       
ITEM 3  -
Quantitative and Qualitative Disclosures about Market Risk
54
       
ITEM 4  -
Controls and Procedures
58
       
PART II  -
OTHER INFORMATION
 
       
ITEM 1  -
Legal Proceedings
58
ITEM 1A -
Risk Factors
59
ITEM 2  -
Unregistered Sales of Equity Securities and Use of Proceeds
59
ITEM 3  -
Defaults Upon Senior Securities
59
ITEM 4  -
Mine Safety Disclosures
59
ITEM 5  -
Other Information
59
ITEM 6  -
Exhibits
60
       
SIGNATURES
61
.




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

 
September 30,
 2020
June 30,
 2020
Assets
   
    Cash and cash equivalents
$
66,467
 
$
116,034
 
    Investment securities – held to maturity, at cost
193,868
 
118,627
 
    Investment securities – available for sale, at fair value
4,416
 
4,717
 
    Loans held for investment, net of allowance for loan losses of
    $8,490 and $8,265, respectively; includes $2,240 and $2,258 at fair value, respectively
884,953
 
902,796
 
   Accrued interest receivable
3,373
 
3,271
 
   Federal Home Loan Bank (“FHLB”) – San Francisco stock
7,970
 
7,970
 
   Premises and equipment, net
10,099
 
10,254
 
   Prepaid expenses and other assets
12,887
 
13,168
 
     
            Total assets
$
1,184,033
 
$
 1,176,837
 
     
Liabilities and Stockholders’ Equity
   
     
Liabilities:
   
   Non interest-bearing deposits
$
114,537
 
$
118,771
 
   Interest-bearing deposits
790,149
 
774,198
 
            Total deposits
904,686
 
892,969
 
     
    Borrowings
136,031
 
141,047
 
    Accounts payable, accrued interest and other liabilities
18,657
 
18,845
 
             Total liabilities
1,059,374
 
1,052,861
 
     
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 18,097,615 shares issued; 7,441,259 and
     7,436,315 shares outstanding, respectively)
181
 
181
 
     Additional paid-in capital
95,948
 
95,593
 
     Retained earnings
194,789
 
194,345
 
     Treasury stock at cost (10,656,356 and 10,661,300 shares, respectively)
(166,358
)
(166,247
)
     Accumulated other comprehensive income, net of tax
99
 
104
 
     
               Total stockholders’ equity
124,659
 
123,976
 
     
               Total liabilities and stockholders’ equity
$
1,184,033
 
$
1,176,837
 

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
 September 30,
 
2020
2019
Interest income:
   
    Loans receivable, net
$
8,917
 
$
10,075
 
    Investment securities
 478
 
614
 
    FHLB – San Francisco stock
 100
 
143
 
    Interest-earning deposits
 24
 
246
 
    Total interest income
9,519
 
11,078
 
     
Interest expense:
   
    Checking and money market deposits
 91
 
110
 
    Savings deposits
 78
 
134
 
    Time deposits
 382
 
532
 
    Borrowings
 802
 
720
 
    Total interest expense
1,353
 
1,496
 
     
Net interest income
8,166
 
9,582
 
Provision (recovery) for loan losses
220
 
(181
)
Net interest income, after  provision (recovery) for loan losses
7,946
 
9,763
 
     
Non-interest income:
   
     Loan servicing and other fees
405
 
133
 
     Deposit account fees
310
 
447
 
     Card and processing fees
364
 
390
 
     Other
80
 
100
 
     Total non-interest income
1,159
 
1,070
 
     
Non-interest expense:
   
     Salaries and employee benefits
4,443
 
4,985
 
     Premises and occupancy
903
 
878
 
     Equipment
275
 
279
 
     Professional expenses
414
 
408
 
     Sales and marketing expenses
113
 
117
 
     Deposit insurance premiums and regulatory assessments
134
 
(16
)
     Other
703
 
587
 
     Total non-interest expense
6,985
 
7,238
 
     
Income before income taxes
2,120
 
3,595
 
Provision for income taxes
635
 
1,033
 
     Net income
$
1,485
 
$
2,562
 
     
Basic earnings per share
$
0.20
 
$
0.34
 
Diluted earnings per share
$
0.20
 
$
0.33
 
Cash dividends per share
$
0.14
 
$
0.14
 
.

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

2


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

 
For the Quarter Ended
 September 30,
 
2020
2019
Net income
$
1,485
 
$
2,562
 
     
Change in unrealized holding loss on securities available for sale
(7
)
(18
)
Reclassification adjustment for net loss on securities available
  for sale included in net loss
 
 
Other comprehensive loss, before income tax benefit
(7
)
(18
)
     
Income tax benefit
(2
)
(5
)
Other comprehensive loss
(5
)
(13
)
     
Total comprehensive income
$
1,480
 
$
2,549
 










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 September 30, 2020 and 2019:
 
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
 
 
Shares
Amount
Total
Balance at June 30, 2020
7,436,315
 
$
181
 
$
95,593
 
$
194,345
 
$
(166,247
)
$
104
 
$
123,976
 
               
Net income
     
1,485
     
1,485
 
Other comprehensive loss
         
(5
)
(5
)
Purchase of treasury stock (1)
(2,556
)
     
(30
)
 
(30
)
Distribution of restricted stock
7,500
                 
Forfeiture of restricted stock
           
81
         
(81
)
       
 
Amortization of restricted stock
   
241
       
241
 
Stock options expense
   
33
       
33
 
Cash dividends (2)
     
(1,041
)
   
(1,041
)
               
Balance at September 30, 2020
7,441,259
 
$
181
 
$
95,948
 
$
194,789
 
$
(166,358
)
$
99
 
$
124,659
 

(1)
Includes the purchase of 2,556 shares of distributed restricted stock in settlement of employee withholding tax obligations.
(2)
Cash dividends of $0.14 per share were paid in the quarter ended September 30, 2020.


 
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
 
 
Shares
Amount
Total
Balance at June 30, 2019
7,486,106
 
$
181
 
$
94,351
 
$
190,839
 
$
(164,891
)
$
161
 
$
120,641
 
               
Net income
     
2,562
     
2,562
 
Other comprehensive loss
         
(13
)
(13
)
Purchase of treasury stock
(16,924
)
     
(346
)
 
(346
)
Exercise of stock options
10,500
   
132
       
132
 
Forfeiture of restricted stock
           
72
         
(72
)
       
 
Amortization of restricted stock
   
220
       
220
 
Stock options expense
   
20
       
20
 
Cash dividends (1)
     
(1,047
)
   
(1,047
)
               
Balance at September 30, 2019
7,479,682
 
$
181
 
$
94,795
 
$
192,354
 
$
(165,309
)
$
148
 
$
122,169
 

(1)
Cash dividends of $0.14 per share were paid in the quarter ended September 30, 2019.




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

4

PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited - In Thousands)
 
Three Months Ended
September 30,
 
2020
2019
Cash flows from operating activities:
   
   Net income
$
1,485
 
$
2,562
 
   Adjustments to reconcile net income to net cash provided by (used for) operating
   activities:
   
       Depreciation and amortization
1,266
 
790
 
       Provision (recovery) for loan losses
220
 
(181
)
       Stock-based compensation
274
 
240
 
       Provision for deferred income taxes
27
 
1,173
 
Decrease in accounts payable, accrued interest and other liabilities
(158
)
(1,505
)
Increase in prepaid expenses and other assets
(66
)
(3,288
)
          Net cash provided by (used for) operating activities
3,048
 
(209
)
     
Cash flows from investing activities:
   
   Decrease (increase) in loans held for investment, net
17,157
 
(44,368
)
   Maturity of investment securities held to maturity
400
 
 
   Principal payments from investment securities held to maturity
9,119
 
8,872
 
   Principal payments from investment securities available for sale
295
 
436
 
   Purchase of investment securities held to maturity
(85,117
)
 
   Purchase of premises and equipment
(69
)
(10
)
          Net cash used for investing activities
(58,215
)
(35,070
)
     
Cash flows from financing activities:
   
   Increase (decrease) in deposits, net
11,717
 
(9,535
)
   Repayments of short-term borrowings, net
(5,000
)
 
   Repayments of long-term borrowings
(16
)
(15
)
   Proceeds from long-term borrowings
 
30,000
 
   Exercise of stock options
 
132
 
   Withholding taxes on stock based compensation
(30
)
(27
)
   Cash dividends
(1,041
)
(1,047
)
   Treasury stock purchases
(30
)
(346
)
          Net cash provided by financing activities
5,600
 
19,162
 
     
Net decrease in cash and cash equivalents
(49,567
)
(16,117
)
Cash and cash equivalents at beginning of period
116,034
 
70,632
 
Cash and cash equivalents at end of period
$
66,467
 
$
54,515
 
Supplemental information:
   
   Cash paid for interest
$
1,343
 
$
1,475
 
   Cash paid for income taxes
$
1,020
 
$
 
   Transfer of loans held for sale to held for investment
$
 
$
566
 


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

5

PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements

September 30, 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, 2020 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, 2020.  The results of operations for the quarter ended September 30, 2020 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2021.

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, 2020, other than:

ASU 2018-13:
In August 2018, the Financial Accounting Standards Board (“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. The adoption of this ASU did not have a material impact on its consolidated financial statements. See Note 7 for additional discussion.






6

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 September 30, 2020 and 2019, there were outstanding options to purchase 554,500 shares and 560,250 shares of the Corporation’s common stock, respectively. Of those shares, as of September 30, 2020 and 2019, there were 419,500 shares and no shares, respectively, which were excluded from the diluted EPS computation as their effect was anti-dilutive. As of September 30, 2020 and 2019, there were outstanding restricted stock awards of 209,000 shares and 225,500 shares, respectively. The outstanding restricted stock had no dilutive effect for the quarter ended September 30, 2020, but had a dilutive effect for the quarter ended September 30, 2019.

The following table provides the basic and diluted EPS computations for the quarter ended September 30, 2020 and 2019, respectively.
 
For the Quarter Ended
September 30,
(In Thousands, Except Earnings Per Share)
2020
2019
Numerator:
   
Net income  – numerator for basic earnings per share and diluted earnings per share -
  available to common stockholders
$
1,485
 
$
2,562
 
     
Denominator:
   
     Denominator for basic earnings per share:
   
         Weighted-average shares
7,436
 
7,482
 
     
     Effect of dilutive shares:
   
        Stock options
21
 
136
 
        Restricted stock
 
30
 
     
     Denominator for diluted earnings per share:
   
        Adjusted weighted-average shares and assumed conversions
7,457
 
7,648
 
     
Basic earnings per share
$
0.20
 
$
0.34
 
Diluted earnings per share
$
0.20
 
$
0.33
 






7

Note 4: Investment Securities

The amortized cost and estimated fair value of investment securities as of September 30, 2020 and June 30, 2020 were as follows:

September 30, 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)
$
191,224
 
$
2,844
 
$
(147
)
$
193,921
 
$
191,224
 
   U.S. SBA securities (2)
2,044
 
 
(18
)
2,026
 
2,044
 
   Certificate of deposits
600
 
 
 
600
 
600
 
Total investment securities - held to maturity
$
193,868
 
$
2,844
 
$
(165
)
$
196,547
 
$
193,868
 
           
Available for sale:
         
   U.S. government agency MBS
$
2,612
 
$
114
 
$
 
$
2,726
 
$
2,726
 
   U.S. government sponsored enterprise MBS
1,489
 
17
 
 
1,506
 
1,506
 
   Private issue CMO (3)
188
 
 
(4
)
184
 
184
 
Total investment securities - available for sale
$
4,289
 
$
131
 
$
(4
)
$
4,416
 
$
4,416
 
Total investment securities
$
198,157
 
$
2,975
 
$
(169
)
$
200,963
 
$
198,284
 

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

June 30, 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
$
115,763
 
$
2,636
 
$
(45
)
$
118,354
 
$
115,763
 
   U.S. SBA securities
2,064
 
 
(17
)
2,047
 
2,064
 
   Certificate of deposits
800
 
 
 
800
 
800
 
Total investment securities - held to maturity
$
118,627
 
$
2,636
 
$
(62
)
$
121,201
 
$
118,627
 
           
Available for sale
         
   U.S. government agency MBS
$
2,823
 
$
120
 
$
 
$
2,943
 
$
2,943
 
   U.S. government sponsored enterprise MBS
1,556
 
21
 
 
1,577
 
1,577
 
   Private issue CMO
204
 
 
(7
)
197
 
197
 
Total investment securities - available for sale
$
4,583
 
$
141
 
$
(7
)
$
4,717
 
$
4,717
 
Total investment securities
$
123,210
 
$
2,777
 
$
(69
)
$
125,918
 
$
123,344
 

In the first quarter of fiscal 2021 and 2020, the Corporation received MBS principal payments of $9.4 million and $9.3 million, respectively, and there were no sales of investment securities during these periods. The Corporation purchased $84.9 million of U.S. government sponsored enterprise MBS to be held to maturity in the first quarter of fiscal 2021 but did not purchase any investment securities in the first quarter of fiscal 2020.

8

The Corporation held investments with an unrealized loss position of $169,000 at September 30, 2020 and $69,000 at June 30, 2020.
As of September 30, 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
$
63,446
 
$
147
   
$
 
$
   
$
63,446
 
$
147
 
U.S. SBA securities
 
 
$
     
2,026
   
18
     
2,026
   
18
 
Total investment securities – held to maturity
$
63,446
 
$
147
   
$
2,026
 
$
18
   
$
65,472
 
$
165
 
                                         
Available for sale
                                       
Private issue CMO
$
184
  $
4
    $

  $

    $
184
  $
4
 
Total investment securities – available for sale $
184
  $
4
    $

  $

    $
184
  $
4
 
Total investment securities $
63,630
  $
151
    $
2,026
  $
18
    $
65,656
  $
169
 


As of June 30, 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
$
12,731
 
$
45
   
$
 
$
   
$
12,731
 
$
45
 
U.S. SBA securities
 
 
$
     
2,040
   
17
     
2,040
   
17
 
Total investment securities – held to maturity
$
12,731
 
$
45
   
$
2,040
 
$
17
   
$
14,771
 
$
62
 
                                         
Available for sale
                                       
Private issue CMO
$
197
 
$
7
   
$
 
$
   
$
197
 
$
7
 
Total investment securities – available for sale
$
197
 
$
7
   
$
 
$
   
$
197
 
$
7
 
Total investment securities
$
12,928
 
$
52
   
$
2,040
 
$
17
   
$
14,968
 
$
69
 

The Corporation evaluates individual investment securities quarterly for other-than-temporary declines in market value. At September 30, 2020, $18,000 of the $169,000 unrealized holding losses were 12 months or more; while at June 30, 2020, $17,000 of the $69,000 unrealized holding losses were 12 months or more. The unrealized losses on investment securities were attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. At September 30, 2020 and 2019, the Corporation did not have any investment securities with the intent to sell and determined it was more likely than not that the Corporation would not be required to sell the securities prior to recovery of the amortized cost basis; therefore, no impairment losses were recorded for the quarter ended September 30, 2020 and 2019.


9

Contractual maturities of investment securities as of September 30, 2020 and June 30, 2020 were as follows:
 
September 30, 2020
 
June 30, 2020
(In Thousands)
Amortized
Cost
Estimated
Fair
Value
 
Amortized
Cost
Estimated
Fair
Value
           
Held to maturity:
         
Due in one year or less
$
600
 
$
600
   
$
800
 
$
800
 
Due after one through five years
21,057
 
21,956
   
19,389
 
20,194
 
Due after five through ten years
69,215
 
70,425
   
50,895
 
52,315
 
Due after ten years
102,996
 
103,566
   
47,543
 
47,892
 
Total investment securities - held to maturity
$
193,868
 
$
196,547
   
$
118,627
 
$
121,201
 
           
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
4,289
 
4,416
   
4,583
 
4,717
 
Total investment securities - available for sale
$
4,289
 
$
4,416
   
$
4,583
 
$
4,717
 
Total investment securities
$
198,157
 
$
200,963
   
$
123,210
 
$
125,918
 


Note 5: Loans Held for Investment

Loans held for investment, net of fair value adjustments, consisted of the following:
(In Thousands)
September 30,
2020
June 30,
2020
Mortgage loans:
   
    Single-family
$
288,790
 
$
298,810
 
    Multi-family
 482,900
 
491,903
 
    Commercial real estate
 105,207
 
105,235
 
    Construction (1)
 8,787
 
7,801
 
    Other
 142
 
143
 
Commercial business loans (2)
 923
 
480
 
Consumer loans (3)
 100
 
94
 
    Total loans held for investment, gross
886,849
 
904,466
 
     
Advance payments of escrows
39
 
68
 
Deferred loan costs, net
6,555
 
6,527
 
Allowance for loan losses
(8,490
)
(8,265
)
    Total loans held for investment, net
$
884,953
 
$
902,796
 

(1)
Net of $3.4 million and $4.0 million of undisbursed loan funds as of September 30, 2020 and June 30, 2020, respectively
(2)
Net of $485 thousand and $935 thousand of undisbursed lines of credit as of September 30, 2020 and June 30, 2020, respectively.
(3)
Net of $443 thousand and $448 thousand of undisbursed lines of credit as of September 30, 2020 and June 30, 2020, respectively.

10

The following table sets forth information at September 30, 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 of loans held for investment at September 30, 2020 and June 30, 2020, 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
$
75,377
 
$
56,552
 
$
74,327
 
$
74,546
 
$
7,988
 
$
288,790
 
    Multi-family
158,412
 
155,709
 
154,045
 
14,586
 
148
 
482,900
 
    Commercial real estate
48,576
 
28,123
 
28,195
 
 
313
 
105,207
 
    Construction
6,626
 
 
 
 
2,161
 
8,787
 
    Other
 
 
 
 
142
 
142
 
Commercial business loans
535
 
 
 
 
388
 
923
 
Consumer loans
100
 
 
 
 
 
100
 
    Total loans held for investment,
      gross
$
289,626
 
$
240,384
 
$
256,567
 
$
89,132
 
$
11,140
 
$
886,849
 

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.

11


Doubtful - A doubtful loan has all of the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable.
Loss - A loss loan is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted.

The following tables summarize gross loans held for investment, net of fair value adjustments, by loan types and risk category at the dates indicated:
   
September 30, 2020
(In Thousands)
Single-
family
Multi-
family
Commercial
Real Estate
Construction
Other
Mortgage
Commercial
Business
Consumer
Total
                   
Pass
$
281,593
 
$
479,145
 
$
105,207
 
$
8,787
 
$
142
 
$
892
 
$
100
 
$
875,866
 
Special Mention
2,175
 
3,755
 
 
   
 
 
 
5,930
 
Substandard
5,022
 
 
 
   
 
31
 
 
5,053
 
 
Total loans held for
   investment, gross
$
288,790
 
$
482,900
 
$
105,207
 
$
8,787
 
$
142
 
$
923
 
$
100
 
$
886,849
 

   
June 30, 2020
(In Thousands)
Single-
family
Multi-
family
Commercial
Real Estate
Construction
Other
Mortgage
Commercial
Business
Consumer
Total
                   
Pass
$
289,942
 
$
488,126
 
$
105,235
 
$
6,098
 
$
143
 
$
445
 
$
94
 
$
890,083
 
Special Mention
3,120
 
3,777
 
 
1,703
 
 
 
 
8,600
 
Substandard
5,748
 
 
 
 
 
35
 
 
5,783
 
 
Total loans held for
   investment, gross
$
298,810
 
$
491,903
 
$
105,235
 
$
7,801
 
$
143
 
$
480
 
$
94
 
$
904,466
 

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 coronavirus of 2019 (“COVID-19”) pandemic, which has negatively impacted the current economic environment, the qualitative component has been increased 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, the charge-off occurs when the loan becomes 60 days delinquent.  The amount of the charge-off is determined by comparing the

12

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
September 30,
(Dollars in Thousands)
2020
2019
     
Allowance at beginning of period
$
8,265
 
$
7,076
 
     
Provision (recovery) for loan losses
220
 
(181
)
     
Recoveries:
   
Mortgage loans:
   
          Single-family
5
 
36
 
     Total recoveries
5
 
36
 
     
Charge-offs:
   
Mortgage loans:
   
          Single-family
 
(1
)
Consumer loans
 
(1
)
     Total charge-offs
 
(2
)
     
     Net recoveries (charge-offs)
5
 
34
 
          Balance at end of period
$
8,490
 
$
6,929
 
     
Allowance for loan losses as a percentage of gross loans held for investment at the end of the
  period
0.95
%
0.74
%
Net (recoveries) charge-offs as a percentage of average loans receivable, net, during the
  period (annualized)
(0.00)
%
(0.02)
%



13

The following tables denote the past due status of the Corporation's gross loans held for investment, net of fair value adjustments, at the dates indicated.
   
September 30, 2020
(In Thousands)
Current
30-89 Days
Past Due
Non-Accrual (1)
Total Loans Held for
Investment, Gross
           
Mortgage loans:
       
 
Single-family
$
283,862
 
$
 
$
4,928
 
$
288,790
 
 
Multi-family
482,900
 
 
 
482,900
 
 
Commercial real estate
105,207
 
 
 
105,207
 
 
Construction
8,787
 
 
 
8,787
 
 
Other
142
 
 
 
142
 
Commercial business loans
892
 
 
31
 
923
 
Consumer loans
98
 
2
 
 
100
 
 
Total loans held for investment, gross
$
881,888
 
$
2
 
$
4,959
 
$
886,849
 

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

   
June 30, 2020
(In Thousands)
Current
30-89 Days
Past Due
Non-Accrual(1)
Total Loans Held for
Investment, Gross
           
Mortgage loans:
       
 
Single-family
$
293,326
 
$
219
 
$
5,265
 
$
298,810
 
 
Multi-family
491,903
 
 
 
491,903
 
 
Commercial real estate
105,235
 
 
 
105,235
 
 
Construction
7,801
 
 
 
7,801
 
 
Other
143
 
 
 
143
 
Commercial business loans
445
 
 
35
 
480
 
Consumer loans
94
 
 
 
94
 
 
Total loans held for investment, gross
$
898,947
 
$
219
 
$
5,300
 
$
904,466
 

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



14

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

  Quarter Ended September 30, 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
$
2,622
 
$
4,329
 
$
1,110
 
$
171
 
$
3
 
$
24
 
$
6
   
$
8,265
 
Provision (recovery) for loan losses
44
 
161
 
52
 
(55
)
 
 
18
 
   
220
 
Recoveries
5
 
 
 
   
 
 
   
5
 
Charge-offs
 
 
 
   
 
 
   
 
 
Allowance for loan losses,
  end of period
$
2,671
 
$
4,490
 
$
1,162
 
$
116
 
$
3
 
$
42
 
$
6
   
$
8,490
 
                       
Allowance for loan losses:
                   
Individually evaluated for impairment
$
80
 
$
 
$
 
$
 
$
 
$
4
 
$
   
$
84
 
Collectively evaluated for impairment
2,591
 
4,490
 
1,162
 
116
   
3
 
38
 
6
   
8,406
 
 
Allowance for loan losses,
  end of period
$
2,671
 
$
4,490
 
$
1,162
 
$
116
 
$
3
 
$
42
 
$
6
   
$
8,490
 
                       
Loans held for investment:
                   
Individually evaluated for impairment
$
2,957
 
$
 
$
 
$
 
$
 
$
31
 
$
   
$
2,988
 
Collectively evaluated for impairment
285,833
 
482,900
 
105,207
 
8,787
   
142
 
892
 
100
   
883,861
 
 
Total loans held for investment,
  gross
$
288,790
 
$
482,900
 
$
105,207
 
$
8,787
 
$
142
 
$
923
 
$
100
   
$
886,849
 
Allowance for loan losses as
  a percentage of gross loans
  held for investment
  0.92
%
  0.93
%
  1.10
%
  1.32
%
  2.11
%
  4.55
%
  6.00
%
    0.95
%






15

  Quarter Ended September 30, 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
$
2,709
 
$
3,219
 
$
1,050
 
$
61
 
$
3
 
$
26
 
$
8
 
$
7,076
 
Provision (recovery) for loan losses
(510
)
288
 
35
 
13
   
(3
)
(6
)
2
 
(181
)
Recoveries
36
 
 
 
   
 
 
 
36
 
Charge-offs
(1
)
 
 
   
 
 
(1
)
(2
)
 
Allowance for loan losses,
  end of period
$
2,234
 
$
3,507
 
$
1,085
 
$
74
 
$
 
$
20
 
$
9
 
$
6,929
 
                       
Allowance for loan losses:
                   
Individually evaluated for impairment
$
47
 
$
 
$
 
$
 
$
 
$
7
 
$
 
$
54
 
Collectively evaluated for impairment
2,187
 
3,507
 
1,085
 
74
   
 
13
 
9
 
6,875
 
 
Allowance for loan losses,
  end of period
$
2,234
 
$
3,507
 
$
1,085
 
$
74
 
$
 
$
20
 
$
9
 
$
6,929
 
                       
Loans held for investment:
                   
Individually evaluated for impairment
$
3,766
 
$
 
$
 
$
1,139
 
$
 
$
45
 
$
 
$
4,950
 
Collectively evaluated for impairment
324,566
 
479,597
 
110,652
 
4,773
   
 
323
 
144
 
920,055
 
 
Total loans held for investment,
  gross
$
328,332
 
$
479,597
 
$
110,652
 
$
5,912
 
$
 
$
368
 
$
144
 
$
925,005
 
Allowance for loan losses as
  a percentage of gross loans
  held for investment
  0.68
%
  0.73
%
  0.98
%
  1.25
%
 
%
  5.43
%
  6.25
%
  0.74
%







16

The following tables identify the Corporation’s total recorded investment in non-performing loans by type at the dates and for the periods indicated.  Generally, a loan is placed on non-accrual status when it becomes 90 days past due as to principal or interest or if the loan is deemed impaired, after considering economic and business conditions and collection efforts, where the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful.  In addition, interest income is not recognized on any loan where management has determined that collection is not reasonably assured.  A non-performing loan may be restored to accrual status when delinquent principal and interest payments are brought current, the borrower(s) has demonstrated sustained payment performance and future monthly principal and interest payments are expected to be collected on a timely basis.  Loans with a related allowance reserve have been individually evaluated for impairment using either a discounted cash flow analysis or, for collateral dependent loans, current appraisals less costs to sell, to establish realizable value.  This analysis may identify a specific impairment amount needed or may conclude that no reserve is needed.  Loans that are not individually evaluated for impairment are included in pools of homogeneous loans for evaluation of related allowance reserves.
     
At September 30, 2020
     
Unpaid
     
Net
     
Principal
Related
Recorded
 
Recorded
(In Thousands)
Balance
Charge-offs
Investment
Allowance (1)
Investment
               
Mortgage loans:
         
 
Single-family:
         
   
With a related allowance
$
3,352
 
$
 
$
3,352
 
$
(430
)
$
2,922
 
   
Without a related allowance (2)
2,045
 
(462
)
1,583
 
 
1,583
 
 
Total single-family
5,397
 
(462
)
4,935
 
(430
)
4,505
 
               
Commercial business loans:
         
 
With a related allowance
31
 
 
31
 
(4
)
27
 
Total commercial business loans
31
 
 
31
 
(4
)
27
 
               
Total non-performing loans
$
5,428
 
$
(462
)
$
4,966
 
$
(434
)
$
4,532
 

(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.







17

     
At June 30, 2020
     
Unpaid
     
Net
     
Principal
Related
Recorded
 
Recorded
(In Thousands)
Balance
Charge-offs
Investment
Allowance (1)
Investment
               
Mortgage loans:
         
 
Single-family:
         
   
With a related allowance
$
3,289
 
$
 
$
3,289
 
$
(438
)
$
2,851
 
   
Without a related allowance (2)
2,509
 
(467
)
2,042
 
 
2,042
 
 
Total single-family
5,798
 
(467
)
5,331
 
(438
)
4,893
 
               
Commercial business loans:
         
 
With a related allowance
35
 
 
35
 
(4
)
31
 
Total commercial business loans
35
 
 
35
 
(4
)
31
 
               
Total non-performing loans
$
5,833
 
$
(467
)
$
5,366
 
$
(442
)
$
4,924
 

(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 September 30, 2020, there were no commitments to lend additional funds to those borrowers whose loans were classified as non-performing.

For both quarters ended September 30, 2020 and 2019, the Corporation’s average recorded investment in non-performing loans was $5.4 million.  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 September 30, 2020, the Bank received $50,000 in interest payments from non-performing loans, of which $40,000 were recognized as interest income and the remaining $10,000 were applied to reduce the loan balances under the cost recovery method.  In comparison, for the quarter ended September 30, 2019, the Bank received $153,000 in interest payments from non-performing loans, of which $129,000 were recognized as interest income and the remaining $24,000 were applied to reduce the loan balances under the cost recovery method.






18

The following tables present the average recorded investment in non-performing loans and the related interest income recognized for the quarter ended September 30, 2020 and 2019:
     
Quarter Ended September 30,
     
2020
 
2019
     
Average
Interest
 
Average
Interest
     
Recorded
Income
 
Recorded
Income
(In Thousands)
Investment
Recognized
 
Investment
Recognized
               
Without related allowances:
         
 
Mortgage loans:
         
   
Single-family
$
1,883
 
$
   
$
3,086
 
$
116
 
   
Construction
 
   
1,084
 
 
     
1,883
 
   
4,170
 
116
 
               
With related allowances:
         
 
Mortgage loans:
         
   
Single-family
3,510
 
40
   
1,198
 
12
 
 
Commercial business loans
32
 
1
   
46
 
1
 
   
3,542
 
41
   
1,244
 
13
 
             
 
Total
$
5,425
 
$
41
   
$
5,414
 
$
129
 

For the quarter ended September 30, 2020, one loan was restructured from its original terms and classified as a restructured loan, while one restructured loan was upgraded to the pass category. For the quarter ended September 30, 2019, no new loans were restructured from their original terms and classified as restructured loans, while two substandard restructured loans were paid off. During both quarters ended September 30, 2020 and 2019, no restructured loans were in default within a 12-month period subsequent to their original restructuring. Additionally, during the quarter ended September 30, 2020, there was no loan whose modification was extended beyond the initial maturity of the modification. At both September 30, 2020 and June 30, 2020, there were no commitments to lend additional funds to those borrowers whose loans were restructured.

As of September 30, 2020, the Corporation held eight restructured loans with a net outstanding balance of $2.4 million, and all loans were classified as substandard and on non-accrual status. As of June 30, 2020, the Corporation held eight restructured loans with a net outstanding balance of $2.6 million, and all loans were classified as substandard on non-accrual status. As of September 30, 2020, all of the restructured loans were current with respect to their modified payment terms, as compared to June 30, 2020 when $1.1 million or 44% 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

19

information, new credit report, current loan balance, new interest rate, remaining loan term, updated property value and modified payment schedule, among other considerations, to determine if the borrower qualifies.

The following table summarizes at the dates indicated the restructured loan balances, net of allowance for loan losses, by loan type:

 
At
At
(In Thousands)
September 30, 2020
June 30, 2020
Restructured loans on non-accrual status:
   
     Mortgage loans:
   
        Single-family
$
2,421
 
$
2,612
 
     Commercial business loans
27
 
31
 
        Total
2,448
 
2,643
 
        Total restructured loans
$
2,448
 
$
2,643
 

The following tables identify the Corporation’s total recorded investment in restructured loans by type at the dates and for the periods indicated.
     
At September 30, 2020
     
Unpaid
     
Net
     
Principal
Related
Recorded
 
Recorded
(In Thousands)
Balance
Charge-offs
Investment
Allowance (1)
Investment
               
Mortgage loans:
         
 
Single-family:
         
   
With a related allowance
$
1,640
 
$
 
$
1,640
 
$
(86
)
$
1,554
 
   
Without a related allowance (2)
1,232
 
(365
)
867
 
 
867
 
 
Total single-family
2,872
 
(365
)
2,507
 
(86
)
2,421
 
               
Commercial business loans:
         
 
With a related allowance
31
 
 
31
 
(4
)
27
 
Total commercial business loans
31
 
 
31
 
(4
)
27
 
               
Total restructured loans
$
2,903
 
$
(365
)
$
2,538
 
$
(90
)
$
2,448
 

(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.



20

     
At June 30, 2020
     
Unpaid
     
Net
     
Principal
Related
Recorded
 
Recorded
(In Thousands)
Balance
Charge-offs
Investment
Allowance(1)
Investment
               
Mortgage loans:
         
 
Single-family:
         
   
With a related allowance
$
1,650
 
$
 
$
1,650
 
$
(108
)
$
1,542
 
   
Without a related allowance(2)
1,435
 
(365
)
1,070
 
 
1,070
 
 
Total single-family
3,085
 
(365
)
2,720
 
(108
)
2,612
 
               
Commercial business loans:
         
 
With a related allowance
35
 
 
35
 
(4
)
31
 
Total commercial business loans
35
 
 
35
 
(4
)
31
 
               
Total restructured loans
$
3,120
 
$
(365
)
$
2,755
 
$
(112
)
$
2,643
 

(1)  Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan.
(2)  There was no related allowance for loan losses because the loans have been charged-off to their fair value or the fair value of the collateral is higher than the loan balance.

During the quarter ended September 30, 2020 and 2019, no properties were acquired in the settlement of loans and no previously foreclosed upon properties were sold. As of September 30, 2020 and June 30, 2020, 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 owned operating expenses as incurred.

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 considered restructured loans. 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 and related guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. The interim condensed consolidated financial information below reflects the application of this guidance.

As of September 30, 2020, the Corporation has 44 single-family forbearance loans, with outstanding balances of $17.2 million or 1.94 percent of total loans, and one multi-family loan with an outstanding balance of $455,000 or 0.05 percent of total loans that were modified in accordance with the CARES Act or Interagency Statement. In addition, as of September 30, 2020, the Corporation had one pending request for payment relief for a single-family loan totaling approximately $264,000.



21

As of September 30, 2020, loan forbearance related to COVID-19 hardship requests are described below:

 
Forbearance Granted
Forbearance Completed
Forbearance Remaining
(Dollars In Thousands)
Number of
Loans
Amount
Number of
Loans
Amount
Number of
Loans
Amount
Single-family loans
 
57
 
$
23,036
   
13
 
$
5,872
   
44
 
$
17,164
 
Multi-family loans
 
4
   
2,043
   
3
   
1,588
   
1
   
455
 
Commercial real estate loans
 
2
   
1,069
   
2
   
1,069
   
   
 
Total loan forbearance
 
63
 
$
26,148
   
18
 
$
8,529
   
45
 
$
17,619
 


As of September 30, 2020, certain characteristics of loans in forbearance are described below:

(Dollars In Thousands)
Number of
Loans
Amount
% of
Total
Loans
Weighted
Avg. LTV(1)
Weighted
Avg.
FICO(2)
Weighted
Avg. Debt
Coverage
Ratio(3)
Weighted Avg. Forbearance
Period
Granted(4)
Single-family loans
 
44
 
$
17,164
 
1.94
%
 
62
%
 
737
   
N/A
   
6.0
 
Multi-family loans
 
1
   
455
 
0.05
%
 
60
%
 
687
   
1.32
x
 
3.0
 
Total loans in forbearance
 
45
 
$
17,619
 
1.99
%
 
62
%
 
733
   
1.32
x
 
5.9
 

(1)
Current loan balance in comparison to the original appraised value.
(2)
At time of loan origination, borrowers and/or guarantors.
(3)
At time of loan origination.
(4)
In months.


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 September 30, 2020 and June 30, 2020, the Corporation had commitments to extend credit on loans to be held for investment of $7.7 million and $13.6 million, respectively.




22

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
September 30, 2020
June 30, 2020
(In Thousands)
   
     
Undisbursed loan funds – Construction loans
$
3,436
 
$
4,029
 
Undisbursed lines of credit – Commercial business loans
485
 
935
 
Undisbursed lines of credit – Consumer loans
443
 
448
 
Commitments to extend credit on loans to be held for investment
7,690
 
13,579
 
Total
$
12,054
 
$
18,991
 

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 ended September 30, 2020 and 2019.
 
For the Quarter Ended
 September 30,
(In Thousands)
2020
2019
Balance, beginning of the period
$
126
 
$
141
 
Provision (recovery)
(22
)
2
 
Balance, end of the period
$
104
 
$
143
 

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 September 30, 2020 and June 30, 2020, there were no outstanding derivative financial instruments.

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 September 30, 2020 and June 30, 2020, the Bank serviced $6.9 million and $7.4 million of loans under this program, respectively and has established a recourse liability of $70,000 at both dates.

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 September 30, 2020, the Bank did not repurchase any loans. In comparison during the same quarter last year, the Bank repurchased one loan totaling $566,000 pursuant to the recourse/repurchase covenants contained in the loan sale agreements. There were no other repurchase requests that did not result in the repurchase of the loan itself, which were settled in the quarters ended September 30, 2020 and 2019. In addition to the specific recourse liability for the MPF program, the Bank established a recourse liability of $300,000 and $200,000 for loans sold to other investors as of September 30, 2020 and June 30, 2020, respectively.



23

The following table shows the summary of the recourse liability for the quarter ended September 30, 2020 and 2019:
 
For the Quarter Ended
September 30,
Recourse Liability
2020
2019
(In Thousands)
   
     
Balance, beginning of the period
$
270
 
$
250
 
Provision for recourse liability
100
 
 
Net settlements in lieu of loan repurchases
 
 
Balance, end of the period
$
370
 
$
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.”  ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  ASC 825 permits entities to elect to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the “Fair Value Option”) at specified election dates.  At each subsequent reporting date, an entity is required to report unrealized gains and losses on items in earnings for which the fair value option has been elected.  The objective of the Fair Value Option is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.

The Corporation also adopted ASU 2018-13, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which modifies disclosure requirements on fair value measurements to improve their effectiveness.” The guidance permits entities to consider materiality when evaluating fair value measurement disclosures and, among other modifications, requires certain new disclosures related to Level 3 fair value measurements.

The 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 September 30, 2020:
     
Loans held for investment, at fair value
$
2,240
 
$
2,354
 
$
(114
)
       
As of June 30, 2020:
     
Loans held for investment, at fair value
$
2,258
 
$
2,369
 
$
(111
)

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.


24

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 and interest-only strips; while non-performing loans, mortgage servicing assets ("MSA") and real estate owned, if any, 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).

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.

25

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 Corporation’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.  While management believes the Corporation’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The following fair value hierarchy tables present information at the dates indicated about the Corporation’s assets measured at fair value on a recurring basis:
 
Fair Value Measurement at September 30, 2020 Using:
(In Thousands)
Level 1
Level 2
Level 3
Total
Assets:
       
     Investment securities - available for sale:
       
          U.S. government agency MBS
$
 
$
2,726
 
$
 
$
2,726
 
          U.S. government sponsored enterprise MBS
 
1,506
 
 
1,506
 
          Private issue CMO
 
 
184
 
184
 
               Investment securities - available for sale
 
4,232
 
184
 
4,416
 
         
     Loans held for investment, at fair value
 
 
2,240
 
2,240
 
     Interest-only strips
 
 
13
 
13
 
Total assets
$
 
$
4,232
 
$
2,437
 
$
6,669
 
         
Liabilities
$
 
$
 
$
 
$
 
Total liabilities
$
 
$
 
$
 
$
 





26

 
Fair Value Measurement at June 30, 2020 Using:
(In Thousands)
Level 1
Level 2
Level 3
Total
Assets:
       
     Investment securities - available for sale:
       
          U.S. government agency MBS
$
 
$
2,943
 
$
 
$
2,943
 
          U.S. government sponsored enterprise MBS
 
1,577
 
 
1,577
 
          Private issue CMO
 
 
197
 
197
 
               Investment securities - available for sale
 
4,520
 
197
 
4,717
 
         
     Loans held for investment, at fair value
 
 
2,258
 
2,258
 
     Interest-only strips
 
 
14
 
14
 
Total assets
$
 
$
4,520
 
$
2,469
 
$
6,989
 
         
Liabilities:
$
 
$
 
$
 
$
 
Total liabilities
$
 
$
 
$
 
$
 


The following tables summarize reconciliations of the beginning and ending balances during the periods shown of recurring fair value measurements recognized in the Condensed Consolidated Statements of Financial Condition using Level 3 inputs:
 
For the Quarter Ended September 30, 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, 2020
$
197
  $
2,258
  $
14
  $
2,469
 
   Total gains or losses (realized/unrealized):
               
      Included in earnings
 
(4
)
 
(4
)
      Included in other comprehensive loss
4
 
 
(1
)
(3
)
   Purchases
 
 
 
 
   Issuances
 
 
 
 
   Settlements
(17
)
(14
)
 
(31
)
   Transfers in and/or out of Level 3
 
 
 
 
Ending balance at September 30, 2020
$
184
 
$
2,240
 
$
13
 
$
2,437
 

(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.



27


 
For the Quarter Ended September 30, 2019
 
 
Fair Value Measurement
Using Significant Other Unobservable Inputs
(Level 3)
 
 
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
 
(18
)
 
(18
)
      Included in other comprehensive loss
 
 
(2
)
(2
)
   Purchases
 
 
 
 
   Issuances
 
 
 
 
   Settlements
(16
)
(690
)
 
(706
)
   Transfers in and/or out of Level 3
 
 
 
 
Ending balance at September 30, 2019
$
253
 
$
4,386
 
$
14
 
$
4,653
 

(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.

The following fair value hierarchy tables present information about the Corporation’s assets measured at fair value at the dates indicated on a nonrecurring basis:
 
Fair Value Measurement at September 30, 2020 Using:
(In Thousands)
Level 1
Level 2
Level 3
Total
Non-performing loans
$
 
$
1,583
 
$
2,949
 
$
4,532
 
Mortgage servicing assets
 
 
295
 
295
 
Total
$
 
$
1,583
 
$
3,244
 
$
4,827
 

 
Fair Value Measurement at June 30, 2020 Using:
(In Thousands)
Level 1
Level 2
Level 3
Total
Non-performing loans
$
 
$
2,042
 
$
2,882
 
$
4,924
 
Mortgage servicing assets
 
 
382
 
382
 
Total
$
 
$
2,042
 
$
3,264
 
$
5,306
 





28

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 September 30, 2020:
(Dollars In Thousands)
Fair Value
As of
September 30,
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
$
184
 
Market comparable pricing
Comparability adjustment
(1.3)% - (2.2)%
((1.5)%)
Increase
           
Loans held for investment, at fair value
$
2,240
 
Relative value analysis
Broker quotes
Credit risk factor
98.0% - 105.7%
(101.3%) of par
1.5% - 100.0% (6.1%)
Increase

Decrease
           
Non-performing loans(3)
$
1,581
 
Discounted cash flow
Default rates
5.0%
Decrease
           
Non-performing loans(4)
$
1,368
 
Relative value analysis
Credit risk factor
20.0% - 30.0% (20.1%)
Decrease
           
Mortgage servicing assets
$
295
 
Discounted cash flow
Prepayment speed (CPR)
Discount rate
19.5% - 60.0% (29.6%)
9.0% - 10.5% (9.1%)
Decrease
Decrease
           
Interest-only strips
$
13
 
Discounted cash flow
Prepayment speed (CPR)
Discount rate
19.5% - 29.7% (28.9%)
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.



29

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

Level 1

Level 2

Level 3
Financial assets:
         
Investment securities - held to maturity
$
193,868
 
$
196,547
 
$
 
$
196,547
 
$
 
Loans held for investment, not recorded at fair value
$
882,713
 
$
885,029
 
$
 
$
 
$
885,029
 
FHLB – San Francisco stock
$
7,970
 
$
7,970
 
$
 
$
7,970
 
$
 
           
Financial liabilities:
         
Deposits
$
904,686
 
$
874,890
 
$
 
$
 
$
874,890
 
Borrowings
$
136,031
 
$
141,581
 
$
 
$
 
$
141,581
 

 
June 30, 2020
(In Thousands)
Carrying
Amount
Fair
Value

Level 1

Level 2

Level 3
Financial assets:
         
Investment securities - held to maturity
$
118,627
 
$
121,201
 
$
 
$
121,201
 
$
 
Loans held for investment, not recorded at fair value
$
900,538
 
$
902,074
 
$
 
$
 
$
902,074
 
FHLB – San Francisco stock
$
7,970
 
$
7,970
 
$
 
$
7,970
 
$
 
           
Financial liabilities:
         
Deposits
$
892,969
 
$
864,239
 
$
 
$
 
$
864,239
 
Borrowings
$
141,047
 
$
149,976
 
$
 
$
 
$
149,976
 

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.


30

Borrowings: The fair value of borrowings has been estimated using a discounted cash flow calculation.  The discount rate on such borrowings is based upon rates currently offered for borrowings of similar remaining maturities.

The Corporation has various processes and controls in place to ensure that fair value is reasonably estimated.  The Corporation generally determines fair value of their Level 3 assets and liabilities by using internally developed models which primarily utilize discounted cash flow techniques and prices obtained from independent management services or brokers.  The Corporation performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process.

While the Corporation believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.  During the quarter ended September 30, 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 ended September 30, 2020 and 2019.
 
For the Quarter Ended September 30, 2020
 
Unrealized gains and losses on
(In Thousands)
Investment securities
available for sale
Interest-
only strips
Total
       
Beginning balance at June 30, 2020
$
94
 
$
10
 
$
104
 
       
Other comprehensive loss before reclassifications
(4
)
(1
)
(5
)
Amount reclassified from accumulated other comprehensive income
 
 
 
Net other comprehensive loss
(4
)
(1
)
(5
)
       
Ending balance at September 30, 2020
$
90
 
$
9
 
$
99
 

 
For the Quarter Ended September 30, 2019
 
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
(12
)
(1
)
(13
)
Amount reclassified from accumulated other comprehensive income
 
 
 
Net other comprehensive loss
(12
)
(1
)
(13
)
       
Ending balance at September 30, 2019
$
138
 
$
10
 
$
148
 




31

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.

Disaggregation of Revenue:

The following table includes the Corporation's non-interest income disaggregated by type of services for the quarter ended September 30, 2020 and 2019:

 
For the Quarter Ended
September 30,
Type of Services
2020
2019
(In Thousands)
   
Loan servicing and other fees(1)
$
405
 
$
133
 
Deposit account fees
           310
 
           447
 
Card and processing fees
            364
 
             390
 
Other(2)
             80
 
             100
 
Total non-interest income
$
1,159
 
$
1,070
 

(1)
Not in scope of ASC 606.
(2)
Includes BOLI of $48 thousand and $47 thousand for the quarter ended September 30, 2020 and 2019, respectively, which are not in scope of ASC 606.

For the quarter ended September 30, 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:

Deposit account 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, ATM fees and others. These fees are recognized concurrent with the event on a daily, monthly or quarterly basis, depending on the type of service.

Card and processing fees: Debit interchange income represents fees earned when a debit card issued by the Bank is used. The Bank earns interchange fees from 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

32

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.

Other: Includes asset management fees, certain loan related fees, stop payment fees, wire services fees, safe deposit box fees and 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. Asset management fees are variable, since they are based on the underlying portfolio value, which is subject to market conditions and amounts invested by customers 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. Loan related fees include (loss) gain on sale of loans, prepayment fees, late charges, brokered loan fees, maintenance fees and others. These fees are recognized concurrent with the event on a daily, monthly, quarterly or annual basis, depending on the type of service.

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 September 30, 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 quarters ended September 30, 2020 and 2019, expenses associated with the Corporation’s leases totaled $211,000 and $190,000, respectively, and were recorded in premises and occupancy expenses and equipment expenses in the condensed consolidated statements of operations.



33

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

(In Thousands)
At
September 30, 2020
At
June 30, 2020
Condensed Consolidated Statements of Condition:
   
Premises and equipment - Operating lease right of use assets
$
2,474
 
$
2,525
 
Accounts payable, accrued interest and other liabilities –
Operating lease liabilities
$
2,573
 
$
2,640
 


(In Thousands)
Quarter Ended
September 30, 2020
Quarter Ended
September 30, 2019
Condensed Consolidated Statements of Operations:
   
Premises and occupancy expenses from operating leases (1) (2)
$
199
 
$
179
 
Equipment expenses from operating leases
$
12
 
$
11
 

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

(In Thousands)
Three Months
Ended
September 30, 2020
Three Months
Ended
September 30, 2019
Condensed Consolidated Statements of Cash Flows:
           
Operating cash flows from operating leases, net(1)
$
226
 
$
284
 

(1)
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 September 30, 2020:

 
Amount(1)
Year Ending June 30,
(In Thousands)
2021
$
633
 
2022
707
 
2023
469
 
2024
359
 
2025
255
 
Thereafter
276
 
Total contract lease payments
$
2,699
 
     
Total liability to make lease payments
$
2,573
 
Difference in undiscounted and discounted future lease payments
$
126
 
Weighted average discount rate
 
2.06
%
Weighted average remaining lease term (years)
 
4.3
 
 
(1)   Contractual base rents do not include property taxes and other operating expenses due under respective lease agreements.


34

Note 12: Subsequent Events

On October 29, 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 November 19, 2020 are entitled to receive the cash dividend. The cash dividend will be payable on December 10, 2020.

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

General

Provident Financial Holdings, Inc., a Delaware corporation, was organized in January 1996 for the purpose of becoming the holding company of Provident Savings Bank, F.S.B. ("the Bank") upon the Bank’s conversion from a federal mutual to a federal stock savings bank (“Conversion”).  The Conversion was completed on June 27, 1996.  The Corporation is regulated by the Federal Reserve Board (“FRB”).  At September 30, 2020, the Corporation had total assets of $1.18 billion, total deposits of $904.7 million and total stockholders’ equity of $124.7 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 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 July 30, 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 August 20, 2020, which was paid on September 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.

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.


35

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 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; results of examinations of the Corporation by the FRB or of the Bank by the OCC or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to enter into a formal enforcement action or to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements and restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules, including as a result of Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, 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; 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 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 CARES Act, the

36

Revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (“Interagency Statement”), 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 2020 Annual Report on Form 10-K for the year ended June 30, 2020 in the Critical Accounting Policies section of Management's Discussion and Analysis of Financial Condition and Results of Operations and in Note 1 - Organization and Significant Accounting Policies.  There have been no significant changes during the three months ended September 30, 2020 to the critical accounting policies as described in the Corporation’s 2020 Annual Report on Form 10-K for the period ended June 30, 2020.

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, 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 depositors, such as returned check fees, deposit account service charges, ATM fees, IRA/KEOGH fees, safe deposit box fees, wire transfer fees and overdraft protection fees, among others.

During the next three years, subject to market conditions, the Corporation intends to improve its community banking business by moderately increasing total assets (by increasing single-family, multi-family, commercial real estate, construction and commercial business loans).  In addition, the Corporation intends to decrease the percentage of time deposits in its deposit base and to increase the percentage of lower cost checking and savings accounts.  This strategy is intended to improve core revenue through a higher net interest margin and ultimately, coupled with the growth of the Corporation, an increase in net interest income. While the Corporation’s long-term strategy is for moderate growth, management recognizes that growth may be difficult as a result of weaknesses in general economic conditions. Further, because the length of the COVID-19 pandemic and

37

the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including the 150 basis point reductions in March 2020 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 for the remainder of 2020 and possibly longer.

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, including as a result of COVID-19, 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.

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 its customers, employees and communities are the Corporation’s top priorities. The Centers of Disease Control and Prevention (“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 its employees currently work from the Corporation’s premises and promote social distancing standards. To date, there have been limited 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), requires certain employers to provide employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19, providing additional flexibility to its employees to help navigate their individual challenges.

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 thrus, online and mobile banking services, ATMs, and telephone banking.

On March 27, 2020, the CARES Act was signed into law and on April 7, 2020, the Board of Governors of the Federal Reserve System, FDIC, National Credit Union Administration, OCC and Consumer Financial Protection Bureau issued the Interagency Statement. Among other things, the CARES Act and Interagency Statement provided relief to borrowers, including the opportunity to defer loan payments while not negatively affecting their credit standing. The CARES Act and/or Interagency Statement provided guidance around the modification of loans as a result of the COVID-19 pandemic, and 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 or Interagency Statement prior to any relief, are not restructured loans. For commercial and consumer customers, the Corporation has provided relief options, including payment deferrals from 60 days to 180 days and fee waivers.  As of

38

September 30, 2020, the Corporation has 44 single-family forbearance loans, with outstanding balances of $17.2 million or 1.94 percent of total loans, and one multi-family loan with an outstanding balance of $455,000 or 0.05 percent of total loans that were modified in accordance with the CARES Act or Interagency Statement. In addition, as of September 30, 2020, the Corporation had one pending request for payment relief for a single-family loan totaling approximately $264,000.

Interest income continues to be recognized during the payment deferrals, unless the loans are non-performing. After the payment deferral period, scheduled 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.

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 September 30, 2020, loan forbearance related to COVID-19 hardship requests are described below:

 
Forbearance Granted
Forbearance Completed
Forbearance Remaining
(Dollars In Thousands)
Number of
Loans
Amount
Number of
Loans
Amount
Number of
Loans
Amount
Single-family loans
 
57
 
$
23,036
   
13
 
$
5,872
   
44
 
$
17,164
 
Multi-family loans
 
4
   
2,043
   
3
   
1,588
   
1
   
455
 
Commercial real estate loans
 
2
   
1,069
   
2
   
1,069
   
   
 
Total loan forbearance
 
63
 
$
26,148
   
18
 
$
8,529
   
45
 
$
17,619
 


As of September 30, 2020, certain characteristics of loans in forbearance are described below:

(Dollars In Thousands)
Number
of Loans
Amount
% of
Total
Loans
Weighted
Avg. LTV(1)
Weighted
Avg.
FICO(2)
Weighted
Avg. Debt
Coverage
Ratio(3)
Weighted Avg. Forbearance
Period
Granted(4)
Single-family loans
 
44
 
$
17,164
 
1.94
%
 
62
%
 
737
   
N/A
   
6.0
 
Multi-family loans
 
1
   
455
 
0.05
%
 
60
%
 
687
   
1.32
x
 
3.0
 
Total loans in forbearance
 
45
 
$
17,619
 
1.99
%
 
62
%
 
733
   
1.32
x
 
5.9
 

(1)
Current loan balance in comparison to the original appraised value.
(2)
At time of loan origination, borrowers and/or guarantors.
(3)
At time of loan origination.
(4)
In months.

The Corporation believes the steps we are taking are necessary to effectively manage its portfolio and assist the borrowers 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. The Corporation is cautious when paying overdrafts beyond the client's total deposit relationship, overdraft protection options or their overdraft coverage limits.


39


The Corporation anticipates that the COVID-19 pandemic may continue to impact the 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 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 habits change by debit card customers complying with  COVID-19 governmental safety 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 its 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

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.

Comparison of Financial Condition at September 30, 2020 and June 30, 2020

Total assets increased $7.2 million, or one percent, to $1.18 billion at September 30, 2020 from June 30, 2020.  The increase was primarily attributable to an increase in investment securities, partly offset by decreases in cash and cash equivalents and loans held for investment.

Total cash and cash equivalents, primarily excess cash deposited with the Federal Reserve Bank of San Francisco, decreased $49.5 million, or 43 percent, to $66.5 million at September 30, 2020 from $116.0 million at June 30, 2020.  The decrease in the total cash and cash equivalents was primarily attributable to the utilization of cash to fund purchases of investment securities.

Investment securities (held to maturity and available for sale) increased $75.0 million, or 61 percent, to $198.3 million at September 30, 2020 from $123.3 million at June 30, 2020. The increase was primarily the result of investment purchases totaling $84.9 million, partly offset by scheduled and accelerated principal payments on mortgage-backed securities during the

40

first three months of fiscal 2021. 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 decreased $17.8 million, or two percent, to $885.0 million at September 30, 2020 from $902.8 million at June 30, 2020, primarily due to decreases in single-family and multi-family loans.  During the first three months of fiscal 2021, the Corporation originated $39.1 million of loans held for investment, consisting primarily of single-family and multi-family loans and also purchased $8.9 million of multi-family loans held for investment that are located throughout California. Total loan principal payments during the first three months of fiscal 2021 were $66.3 million, up 31 percent from $50.8 million during the comparable period in fiscal 2020. The single-family loans held for investment balance at September 30, 2020 and June 30, 2020 was $288.8 million and $298.8 million, respectively, and represented approximately 33 percent of loans held for investment at both dates.

The tables below describe the geographic dispersion of gross real estate secured loans held for investment at September 30, 2020 and June 30, 2020, as a percentage of the total dollar amount outstanding:

As of September 30, 2020:
 
Inland
Empire
Southern
California(1)
Other
California
Other
States
Total
Loan Category
Balance
%
Balance
%
Balance
%
Balance
%
Balance
%
Single-family
$
77,026
 
27
%
$
131,639
 
46
%
$
79,598
 
27
%
$
527
 
%
$
288,790
 
100
%
Multi-family
69,349
 
14
%
313,460
 
65
%
99,785
 
21
%
306
 
%
482,900
 
100
%
Commercial real
   estate
23,745
 
23
%
47,467
 
45
%
33,995
 
32
%
 
%
105,207
 
100
%
Construction
1,082
 
12
%
6,430
 
73
%
1,275
 
15
%
 
%
8,787
 
100
%
Other
 
%
142
  100
%

 
%

 
%
142
  100
%
Total
$
171,202
 
19
%
$
499,138
 
57
%
$
214,653
 
24
%
$
833
 
%
$
885,826
 
100
%

(1)
Other than the Inland Empire.

As of June 30, 2020:
 
Inland
Empire
Southern
California(1)
Other
California
Other
States
Total
Loan Category
Balance
%
Balance
%
Balance
%
Balance
%
Balance
%
Single-family
$
82,019
 
28
%
$
140,888
 
47
%
$
75,372
 
25
%
$
531
 
%
$
298,810
 
100
%
Multi-family
66,427
 
14
%
321,556
 
65
%
103,609
 
21
%
311
 
%
491,903
 
100
%
Commercial real
   estate
23,501
 
22
%
47,484
 
45
%
34,250
 
33
%
 
%
105,235
 
100
%
Construction
1,115
 
14
%
5,190
 
67
%
1,496
 
19
%
 
%
7,801
 
100
%
Other
 
%
143
 
100
%
 
%
 
%
143
 
100
%
Total
$
173,062
 
19
%
$
515,261
 
57
%
$
214,727
 
24
%
$
842
 
%
$
903,892
 
100
%

(1)
Other than the Inland Empire.

Total deposits increased $11.7 million, or one percent, to $904.7 million at September 30, 2020 from $893.0 million at June 30, 2020, primarily due to increases in transaction accounts resulting primarily from government assistance programs related to the COVID-19 pandemic, partly offset by a decrease in higher cost time deposits.  Transaction accounts increased $20.7 million, or three percent, to $743.7 million at September 30, 2020 from $723.0 million at June 30, 2020, while time deposits decreased $9.0 million, or five percent, to $161.0 million at September 30, 2020 from $170.0 million at June 30, 2020. The percentage of time deposits to total deposits decreased to 18 percent at September 30, 2020 from 19 percent at June 30, 2020, primarily due to

41

a managed run-off of higher cost time deposits consistent with the reduction in the Bank’s funding needs during the first three months of fiscal 2021.

Total borrowings decreased $5.0 million, or four percent, to $136.0 million at September 30, 2020 as compared to $141.0 million at June 30, 2020, due to a repayment of $5.0 million of short-term borrowings during the first quarter of fiscal 2021. The borrowings are primarily comprised of long-term FHLB - San Francisco advances used for interest rate risk management purposes.

Total stockholders’ equity increased $683,000, or one percent, to $124.7 million at September 30, 2020 from $124.0 million at June 30, 2020, primarily as a result of year-to-date net income of $1.5 million and stock-based compensation of $274,000, partly offset by $1.0 million of quarterly cash dividends paid to shareholders during the first three months of fiscal 2021. The Corporation did not repurchase any shares of its common stock under its April 2020 plan during the three months ended September 30, 2020, but purchased 2,556 shares of distributed restricted stock in settlement of employee withholding tax obligations at an average cost of $11.68 per share.

Comparison of Operating Results for the Quarter ended September 30, 2020 and 2019

The Corporation’s net income for the first quarter of fiscal 2021 was $1.5 million, down $1.1 million or 42 percent from $2.6 million in the same period of fiscal 2020. Compared to the same quarter last year, the decrease was primarily attributable to lower net interest income and a higher provision for loan losses, partly offset by lower non-interest expenses. Earnings for the quarter reflect the continued impact of the COVID-19 pandemic which resulted in a substantial reduction in business activity or the closing of businesses in California.

The Corporation’s efficiency ratio, defined as non-interest expense divided by the sum of net interest income and non-interest income, increased to 75 percent for the first quarter of fiscal 2021 from 68 percent in the same period of fiscal 2020, primarily due to the decrease in net interest income. Return on average assets was 0.50 percent in the first quarter of fiscal 2021, down from 0.95 percent in the same period last year. Return on average equity was 4.78 percent in the first quarter of fiscal 2021, down from 8.46 percent in the same period last year. Diluted earnings per share for the first quarter of fiscal 2021 were $0.20, down from diluted earnings per share of $0.33 in the same period last year.

Net Interest Income:

For the Quarter Ended September 30, 2020 and 2019.  Net interest income decreased by $1.4 million, or 15 percent, to $8.2 million for the first quarter of fiscal 2021 from $9.6 million in the same period in fiscal 2020, as a result of a lower net interest margin, partly offset by a higher average interest-earning asset balance. The net interest margin decreased 80 basis points to 2.84 percent in the first quarter of fiscal 2021 from 3.64 percent in the same period of fiscal 2020, primarily due to a decrease in the average yield for all categories of interest-earning assets attributable primarily to declines in interest rates on adjustable rate instruments and interest-earning deposits following decreases to short-term rates over the last year, including the emergency 150 basis point reduction in the targeted Federal Funds Rate in March 2020 due to the COVID-19 pandemic. The weighted-average yield on interest-earning assets decreased by 90 basis points to 3.31 percent in the first quarter of fiscal 2021 from 4.21 percent in the same quarter last year, and the weighted-average cost of interest-bearing liabilities decreased by 11 basis points to 0.52 percent for the first quarter of fiscal 2021 as compared to 0.63 percent in the same quarter last year. The average balance of interest-earning assets increased $98.5 million, or nine percent, to $1.15 billion in the first quarter of fiscal 2021 from $1.05 billion in the comparable period of fiscal 2020, reflecting increases in the average balance of investment securities and interest-earning deposits, partly offset by a decrease in the average balance of loans receivable. The average balance of interest-bearing liabilities increased by $97.5 million, or 10 percent, to $1.04 billion in the first quarter of fiscal 2021 from $942.5 million in the same quarter last year primarily reflecting increases in the average balance of interest-bearing deposits and, to a lower extent, the average balance of borrowings.



42

Beginning in August 2019, the Federal Reserve reduced the targeted Federal Funds Rate by 25 basis points three times in 2019 and the 150 basis points during the quarter ended March 2020 to a range of 0.00% to 0.25%.  The 150 basis-point decrease in the targeted Federal Funds Rate in response to the COVID-19 pandemic did not occur until late in the quarter in March 2020, and the effect of the lower interest rate environment has continued to be realized during this quarter. Furthermore, the effect of the changes in the targeted Federal Funds Rate on the cost of 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 until the pandemic subsides, the Corporation expects its net interest income and net interest margin will continue to be adversely affected in the remainder of calendar year 2020 and possibly longer.

Interest Income:

For the Quarter Ended September 30, 2020 and 2019.  Total interest income decreased by $1.6 million, or 14 percent, to $9.5 million for the first quarter of fiscal 2021 as compared to $11.1 million for the same quarter of fiscal 2020.  The decrease was primarily due to decreases in interest income from all interest-earning assets.

Interest income on loans receivable decreased by $1.2 million, or 12 percent, to $8.9 million in the first quarter of fiscal 2021 from $10.1 million in the same quarter of fiscal 2020. The decrease was due to a lower average yield and, to a much lower extent, a lower average balance. The average loans receivable yield during the first quarter of fiscal 2021 decreased 47 basis points to 3.99 percent from 4.46 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 and the increase of net deferred loan costs to $466,000 in the first quarter of fiscal 2021 from $160,000 in the same quarter of fiscal 2020. The average balance of loans receivable decreased by $10.3 million, or one percent, to $893.0 million for the first quarter of fiscal 2021 from $903.3 million in the same quarter of fiscal 2020. 

Interest income from investment securities decreased $136,000, or 22 percent, to $478,000 in the first quarter of fiscal 2021 from $614,000 for the same quarter of fiscal 2020. This decrease was attributable to a lower average yield, partly offset by a higher average balance. The average investment securities yield decreased 134 basis points to 1.22 percent in the first quarter of fiscal 2021 from 2.56 percent in the same quarter of fiscal 2020. The decrease in the average investment securities yield was primarily attributable to investment securities purchases at a lower average yield, a higher premium amortization between the quarters ($357,000 vs. $130,000) and the downward repricing of adjustable rate mortgage-backed securities. The average balance of investment securities increased $60.3 million, or 63 percent, to $156.2 million in the first quarter of fiscal 2021 from $95.9 million in the same quarter of fiscal 2020. The increase in the average balance of investment securities was primarily attributable to the investment purchases, partly offset by scheduled and accelerated principal payments on mortgage-backed securities.

The FHLB – San Francisco cash dividend received in the first quarter of fiscal 2021 was $100,000, down $43,000 or 30 percent from the same quarter of fiscal 2020. The average balance of FHLB – San Francisco stock in the first quarter of fiscal 2021 decreased slightly to $8.0 million from $8.2 million in the same quarter of fiscal 2020 and the average yield decreased to 5.02 percent in the first quarter of fiscal 2021 from 6.98 percent in the same quarter last year.

Interest income from interest-earning deposits, primarily cash deposited at the Federal Reserve Bank of San Francisco, was $24,000 in the first quarter of fiscal 2021, down 90 percent from $246,000 in the same quarter of fiscal 2020. The decrease was primarily due to a lower average yield, partly offset by a higher average balance. The average yield earned on interest-earning deposits decreased 206 basis points to 0.10 percent in the first quarter of fiscal 2021 from 2.16 percent in the comparable quarter last year, due primarily to decreases in the targeted Federal Funds Rate over the last year. The average balance of the interest-earning deposits in the first quarter of fiscal 2021 was $93.3 million, an increase of $48.8 million or 110 percent, from $44.5 million in the same quarter of fiscal 2020.



43

Interest Expense:

For the Quarter Ended September 30, 2020 and 2019.  Total interest expense decreased by $143,000 or 10 percent to $1.4 million in the first quarter of fiscal 2021 from $1.5 million in the same quarter last year. This decrease was attributable to lower deposit expense, partly offset by higher borrowing expense.

Interest expense on deposits for the first quarter of fiscal 2021 was $551,000 as compared to $776,000 for the same period last year, a decrease of $225,000, or 29 percent.  The decrease in interest expense on deposits was attributable to a lower average cost of deposits, partly offset by a higher average balance. The average cost of deposits improved, decreasing by 13 basis points to 0.24 percent during the first quarter of fiscal 2021 from 0.37 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 20 basis-point decrease in the average cost of time deposits. The average balance of deposits increased $68.5 million, or eight percent, to $899.3 million during the quarter ended September 30, 2020 from $830.8 million during the same period last year. The increase in the average balance was primarily attributable to an increase in the transaction accounts, partly offset by a decrease in 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 first quarter of fiscal 2021 was 81 percent, compared to 77 percent in the same period of fiscal 2020.

Interest expense on borrowings, consisting primarily of FHLB – San Francisco advances, for the first quarter of fiscal 2021 increased $82,000, or 11 percent, to $802,000 from $720,000 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 $29.1 million, or 26 percent, to $140.7 million during the quarter ended September 30, 2020 from $111.6 million during the same period last year. The average cost of borrowings decreased 30 basis points to 2.26 percent for the quarter ended September 30, 2020 from 2.56 percent in the same quarter last year. The decrease in the average cost of borrowings was primarily due to new long-term borrowings obtained at a lower interest rate than prior borrowings, reflecting the decline in market rates over the last year.





44

The following tables present the average balance sheets for the quarter ended September 30, 2020 and 2019, respectively:

Average Balance Sheets
 
Quarter Ended
September 30, 2020
 
Quarter Ended
September 30, 2019
(Dollars In Thousands)
Average
Balance
Interest
Yield/
Cost
 
Average
Balance
Interest
Yield/
Cost
Interest-earning assets:
             
Loans receivable, net (1)
$
892,971
 
$
8,917
 
3.99
%
 
$
903,272
 
$
10,075
 
4.46
%
Investment securities
 156,235
 
478
 
1.22
%
 
95,945
 
614
 
2.56
%
FHLB – San Francisco stock
 7,970
 
100
 
5.02
%
 
8,199
 
143
 
6.98
%
Interest-earning deposits
 93,276
 
24
 
0.10
%
 
44,511
 
246
 
2.16
%
               
Total interest-earning assets
1,150,452
 
9,519
 
3.31
%
 
1,051,927
 
11,078
 
4.21
%
               
Non interest-earning assets
31,624
       
31,408
     
               
Total assets
$
1,182,076
       
$
1,083,335
     
               
Interest-bearing liabilities:
             
Checking and money market accounts (2)
$
455,528
 
$
91
 
0.08
%
 
$
381,211
 
$
110
 
0.11
%
Savings accounts
 276,413
 
78
 
0.11
%
 
259,651
 
134
 
0.20
%
Time deposits
 167,345
 
382
 
0.91
%
 
189,958
 
532
 
1.11
%
               
Total deposits
899,286
 
551
 
0.24
%
 
830,820
 
776
 
0.37
%
               
Borrowings
140,711
 
802
 
2.26
%
 
111,641
 
720
 
2.56
%
               
Total interest-bearing liabilities
1,039,997
 
1,353
 
0.52
%
 
942,461
 
1,496
 
0.63
%
               
Non interest-bearing liabilities
17,735
       
19,692
     
               
Total liabilities