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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
March 31, 2020
 
 

[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 

 
For the transition period from ________________ to _________________
 

Commission File Number 000-28304


PROVIDENT FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
33-0704889
(State or other jurisdiction of
 
(I.R.S.  Employer
incorporation or organization)
 
Identification No.)

3756 Central Avenue, Riverside, California 92506
(Address of principal executive offices and zip code)

(951) 686-6060
(Registrant’s telephone number, including area code)

_________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.          [X] Yes  [   ] No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).            [X] Yes  [  ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 
Large accelerated filer [   ]
 
Accelerated filer [X]  
 
Non-accelerated filer [   ] 
 
Smaller reporting company [X]
 
 
 
Emerging growth company [   ]
                                                                                                                                                         
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   [   ] Yes [X] No

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of April 30, 2020 there were 7,436,315 shares of the registrant's common stock, $0.01 par value per share, outstanding.


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



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

 
March 31,
 2020
June 30,
 2019
Assets
   
    Cash and cash equivalents
$
84,250
 
$
70,632
 
    Investment securities – held to maturity, at cost
69,482
 
94,090
 
    Investment securities – available for sale, at fair value
4,828
 
5,969
 
    Loans held for investment, net of allowance for loan losses of
    $7,810 and $7,076, respectively; includes $3,835 and $5,094 at fair value, respectively
914,307
 
879,925
 
    Accrued interest receivable
3,154
 
3,424
 
    Federal Home Loan Bank (“FHLB”) – San Francisco stock
8,199
 
8,199
 
    Premises and equipment, net
10,606
 
8,226
 
    Prepaid expenses and other assets
12,741
 
14,385
 
        Total assets
$
1,107,567
 
$
 1,084,850
 
     
Liabilities and Stockholders’ Equity
   
     
Liabilities:
   
    Non interest-bearing deposits
$
86,585
 
$
90,184
 
    Interest-bearing deposits
749,246
 
751,087
 
        Total deposits
835,831
 
841,271
 
     
    Borrowings
131,070
 
101,107
 
    Accounts payable, accrued interest and other liabilities
17,508
 
21,831
 
        Total liabilities
984,409
 
964,209
 
     
Commitments and Contingencies  (Notes 6 and 10)
   
     
Stockholders’ equity:
   
    Preferred stock, $.01 par value (2,000,000 shares authorized;
    none issued and outstanding)
 
 
    Common stock, $.01 par value (40,000,000 shares authorized;
    18,097,615 and 18,081,365 shares issued; 7,436,315 and
    7,486,106 shares outstanding, respectively)
181
 
181
 
    Additional paid-in capital
95,355
 
94,351
 
    Retained earnings
193,802
 
190,839
 
    Treasury stock at cost (10,661,300 and 10,595,259 shares, respectively)
(166,247
)
(164,891
)
    Accumulated other comprehensive income, net of tax
67
 
161
 
     
        Total stockholders’ equity
123,158
 
120,641
 
     
        Total liabilities and stockholders’ equity
$
1,107,567
 
$
1,084,850
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
1

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

   
Quarter Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2020
   
2019
   
2020
   
2019
 
Interest income:
                       
    Loans receivable, net
 
$
 9,622    
$
 10,011    
$
 30,017    
$
30,516
 
    Investment securities
   
478
     
592
     
1,659
     
1,381
 
    FHLB – San Francisco stock
   
144
     
144
     
432
     
565
 
    Interest-earning deposits
   
186
     
386
     
621
     
1,111
 
    Total interest income
   
10,430
     
11,133
     
32,729
     
33,573
 
                                 
Interest expense:
                               
    Checking and money market deposits
   
106
     
102
     
333
     
327
 
    Savings deposits
   
131
     
139
     
396
     
437
 
    Time deposits
   
509
     
600
     
1,571
     
1,851
 
    Borrowings
   
794
     
680
     
2,318
     
2,158
 
    Total interest expense
   
1,540
     
1,521
     
4,618
     
4,773
 
                                 
Net interest income
   
8,890
     
9,612
     
28,111
     
28,800
 
Provision (recovery) for loan losses
   
874
     
4
     
671
     
(450
)
Net interest income, after  provision (recovery) for loan losses
   
8,016
     
9,608
     
27,440
     
29,250
 
                                 
Non-interest income:
                               
    Loan servicing and other fees
   
131
     
262
     
631
     
863
 
    Gain (loss) on sale of loans, net
   
14
     
1,719
     
(115
)
   
7,114
 
    Deposit account fees
   
423
     
471
     
1,321
     
1,485
 
    Gain (loss) on sale and operations of real estate owned acquired in
       the settlement of loans, net
   
     
2
     
     
(4
)
    Card and processing fees
   
360
     
373
     
1,121
     
1,163
 
    Other
   
173
     
225
     
557
     
575
 
    Total non-interest income
   
1,101
     
3,052
     
3,515
     
11,196
 
                                 
Non-interest expense:
                               
    Salaries and employee benefits
   
4,966
     
9,292
     
14,950
     
24,753
 
    Premises and occupancy
   
845
     
1,286
     
2,603
     
3,905
 
    Equipment
   
314
     
417
     
855
     
1,333
 
    Professional expenses
   
351
     
513
     
1,090
     
1,371
 
    Sales and marketing expenses
   
177
     
246
     
506
     
668
 
    Deposit insurance premiums and regulatory assessments
   
54
     
124
     
97
     
461
 
    Other
   
798
     
1,122
     
2,196
     
3,088
 
    Total non-interest expense
   
7,505
     
13,000
     
22,297
     
35,579
 
                                 
Income (loss) before income taxes
   
1,612
     
(340
)
   
8,658
     
4,867
 
Provision (benefit) for income taxes
   
467
     
(189
)
   
2,553
     
1,237
 
    Net income (loss)
 
$
1,145
   
$
(151
)
 
$
6,105
   
$
3,630
 
                                 
Basic earnings (loss) per share
 
$
0.15
   
$
(0.02
)
 
$
0.82
   
$
0.49
 
Diluted earnings (loss) per share
 
$
0.15
   
$
(0.02
)
 
$
0.80
   
$
0.48
 
Cash dividends per share
 
$
0.14
   
$
0.14
   
$
0.42
   
$
0.42
 
.
The accompanying notes are an integral part of these condensed consolidated financial statements.
2


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

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









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

3





PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
In Thousands, Except Share Information

For the Quarter Ended March 31, 2020 and 2019:
   
Common
Stock
   
Additional
Paid-In
    Retained     Treasury    
Accumulated
Other
Comprehensive
Income (Loss),
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Stock
   
Net of Tax
   
Total
 
Balance at December 31, 2019
   
7,483,071
   
$
181
   
$
95,118
   
$
193,704
   
$
(165,360
)
 
$
133
   
$
123,776
 
                                                         
Net income
                           
1,145
                     
1,145
 
Other comprehensive loss
                                           
(66
)
   
(66
)
Purchase of treasury stock
   
(46,756
)
                           
(887
)
           
(887
)
Amortization of restricted stock
               
217
                             
217
 
Stock options expense
                   
20
                             
20
 
Cash dividends (1)
                           
(1,047
)
                   
(1,047
)
                                                         
Balance at March 31, 2020
   
7,436,315
   
$
181
   
$
95,355
   
$
193,802
   
$
(166,247
)
 
$
67
   
$
123,158
 


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

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

(1)
Cash dividends of $0.14 per share were paid in the quarter ended March 31, 2019.



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

4

For the Nine Months Ended March 31, 2020 and 2019:
   
Common
Stock
    Additional
Paid-In
    Retained 
    Treasury
   
Accumulated
Other
Comprehensive
Income (Loss),
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Stock
   
Net of Tax
   
Total
 
Balance at June 30, 2019
   
7,486,106
   
$
181
   
$
94,351
   
$
190,839
   
$
(164,891
)
 
$
161
   
$
120,641
 
                                                         
Net income
                           
6,105
                     
6,105
 
Other comprehensive loss
                                           
(94
)
   
(94
)
Purchase of treasury stock
   
(66,041
)
                           
(1,284
)
           
(1,284
)
Exercise of stock options
   
16,250
             
215
                             
215
 
Forfeiture of restricted stock
                   
72
             
72
             
 
Amortization of restricted
   stock
                   
656
                             
656
 
Stock options expense
                   
61
                             
61
 
Cash dividends (1)
                           
(3,142
)
                   
(3,142
)
                                                         
Balance at March 31, 2020
   
7,436,315
   
$
181
   
$
95,355
   
$
193,802
   
$
(166,247
)
 
$
67
   
$
123,158
 
 (1)   Cash dividends of $0.42 per share were paid in the nine months ended March 31, 2020.


   
Common
Stock
    Additional
Paid-In
    Retained
    Treasury    
Accumulated
Other
Comprehensive
Income (Loss),
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Stock
   
Net of Tax
   
Total
 
Balance at June 30, 2018
   
7,421,426
   
$
181
   
$
94,957
   
$
190,616
   
$
(165,507
)
 
$
210
   
$
120,457
 
                                                         
Net income
                           
3,630
                     
3,630
 
Other comprehensive loss
                                           
(47
)
   
(47
)
Purchase of treasury stock (1)
   
(44,819
)
                           
(845
)
           
(845
)
Exercise of stock options
   
31,250
             
390
                             
390
 
Distribution of restricted
   stock
   
89,500
                                             
 
Amortization of restricted
   stock
                   
426
                             
426
 
Stock options expense
                   
341
                             
341
 
Cash dividends (2)
                           
(3,143
)
                   
(3,143
)
                                                         
Balance at March 31, 2019
   
7,497,357
   
$
181
   
$
96,114
   
$
191,103
   
$
(166,352
)
 
$
163
   
$
121,209
 
(1)   Includes the purchase of 21,071 shares of distributed restricted stock in settlement of employee withholding tax obligations.
(2)   Cash dividends of $0.42 per share were paid in the nine months ended March 31, 2019.





The accompanying notes are an integral part of these condensed consolidated financial statements.
5

PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited - In Thousands)

   
Nine Months Ended
March 31,
 
   
2020
   
2019
 
Cash flows from operating activities:
           
   Net income
 
$
6,105
   
$
3,630
 
   Adjustments to reconcile net income to net cash provided by operating activities:
               
      Depreciation and amortization
   
2,347
     
2,045
 
      Provision (recovery) for loan losses
   
671
     
(450
)
      (Gain) loss on sale of loans, net
   
115
     
(7,114
)
      Stock-based compensation
   
717
     
767
 
      Provision for deferred income taxes
   
881
     
553
 
   Decrease in accounts payable, accrued interest and other liabilities
   
(4,406
)
   
(320
)
   (Increase) decrease in prepaid expenses and other assets
   
(2,524
)
   
437
 
   Loans originated for sale
   
     
(453,444
)
   Proceeds from sale of loans
   
     
526,090
 
          Net cash provided by operating activities
   
3,906
     
72,194
 
                 
Cash flows from investing activities:
               
   (Increase) decrease in loans held for investment, net
   
(35,676
)
   
19,230
 
   Maturity of investment securities held to maturity
   
     
800
 
   Principal payments from investment securities held to maturity
   
24,283
     
24,093
 
   Principal payments from investment securities available for sale
   
1,010
     
1,140
 
   Purchase of investment securities held to maturity
   
     
(40,282
)
   Proceeds from sale of real estate owned
   
     
915
 
   Purchase of premises and equipment
   
(185
)
   
(151
)
         Net cash (used for) provided by investing activities
   
(10,568
)
   
5,745
 
                 
Cash flows from financing activities:
               
   Decrease in deposits, net
   
(5,440
)
   
(30,714
)
   Repayments of short-term borrowings, net
   
     
(15,000
)
   Repayments of long-term borrowings
   
(44
)
   
(10,042
)
   Proceeds from long-term borrowings
   
30,007
     
 
   Exercise of stock options
   
215
     
390
 
   Withholding taxes on stock based compensation
   
(32
)
   
(428
)
   Cash dividends
   
(3,142
)
   
(3,143
)
   Treasury stock purchases
   
(1,284
)
   
(845
)
         Net cash provided by (used for) financing activities
   
20,280
     
(59,782
)
                 
Net increase in cash and cash equivalents
   
13,618
     
18,157
 
Cash and cash equivalents at beginning of period
   
70,632
     
43,301
 
Cash and cash equivalents at end of period
 
$
84,250
   
$
61,458
 
Supplemental information:
               
   Cash paid for interest
 
$
4,625
   
$
4,796
 
   Cash paid for income taxes
 
$
775
   
$
1,555
 
   Transfer of loans held for sale to held for investment
 
$
1,085
   
$
1,360
 


The accompanying notes are an integral part of these condensed consolidated financial statements.
6

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

March 31, 2020

Note 1: Basis of Presentation

The unaudited interim condensed consolidated financial statements included herein reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of the results of operations for the interim periods presented.  All such adjustments are of a normal, recurring nature.  The condensed consolidated statement of financial condition at June 30, 2019 is derived from the audited consolidated financial statements of Provident Financial Holdings, Inc. and its wholly-owned subsidiary, Provident Savings Bank, F.S.B. (the “Bank”) (collectively, the “Corporation”).  Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) with respect to interim financial reporting.  It is recommended that these unaudited interim condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended June 30, 2019.  The results of operations for the quarter ended March 31, 2020 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2020.


Note 2: Accounting Standard Updates (“ASU”)

There have been no accounting standard updates or changes in the status of their adoption that are significant to the Corporation as previously disclosed in Note 1 of the Corporation's Annual Report on Form 10-K for the year ended June 30, 2019, other than:

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

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

7

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

ASU 2018-13:
In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which modifies disclosure requirements on fair value measurements to improve their effectiveness.” The guidance permits entities to consider materiality when evaluating fair value measurement disclosures and, among other modifications, requires certain new disclosures related to Level 3 fair value measurements. This guidance will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The guidance only affects disclosures in the notes to the consolidated financial statements and will not otherwise affect the Corporation’s Consolidated Financial Statements.

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




8

Note 3: Earnings Per Share

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

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

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




9

Note 4: Investment Securities

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

June 30, 2019
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
(Losses)
   
Estimated
Fair
Value
   
Carrying
Value
 
(In Thousands)
                             
Held to maturity
                             
   U.S. government sponsored enterprise MBS
 
$
90,394
   
$
1,289
   
$
(14
)
 
$
91,669
   
$
90,394
 
   U.S. SBA securities
   
2,896
     
     
(6
)
   
2,890
     
2,896
 
   Certificate of deposits
   
800
     
     
     
800
     
800
 
Total investment securities - held to maturity
 
$
94,090
   
$
1,289
   
$
(20
)
 
$
95,359
   
$
94,090
 
                                         
Available for sale
                                       
   U.S. government agency MBS
 
$
3,498
   
$
116
   
$
(1
)
 
$
3,613
   
$
3,613
 
   U.S. government sponsored enterprise MBS
   
1,998
     
89
     
     
2,087
     
2,087
 
   Private issue CMO
   
261
     
8
     
     
269
     
269
 
Total investment securities - available for sale
 
$
5,757
   
$
213
   
$
(1
)
 
$
5,969
   
$
5,969
 
Total investment securities
 
$
99,847
   
$
1,502
   
$
(21
)
 
$
101,328
   
$
100,059
 

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

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

10

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

The Corporation held investments with an unrealized loss position of $121,000 at March 31, 2020 and $21,000 at June 30, 2019.
As of March 31, 2020
 
Unrealized Holding
Losses
   
Unrealized Holding
Losses
   
Unrealized Holding
Losses
 
(In Thousands)
 
Less Than 12 Months
   
12 Months or More
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
Description  of Securities
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
Held to maturity:
                                   
   U.S. government sponsored enterprise MBS
 
$
12,057
   
$
88
   
$
   
$
   
$
12,057
   
$
88
 
   U.S. SBA securities
   
     
     
2,072
     
11
     
2,072
     
11
 
Total investment securities – held to maturity
 
$
12,057
   
$
88
   
$
2,072
   
$
11
   
$
14,129
   
$
99
 
                                                 
Available for sale
                                               
Private issue CMO
  $
 197     $
 22     $
    $
 —     $
 197     $
 22  
Total investment securities – available for sale
  $
 197     $  22     $
 —     $
 —     $
 197     $
 22  
Total investment securities
  $
 12,254     $
 110     $
 2,072     $
 11     $
 14,326     $
 121  


As of June 30, 2019
 
Unrealized Holding
Losses
   
Unrealized Holding
Losses
   
Unrealized Holding
Losses
 
(In Thousands)
 
Less Than 12 Months
   
12 Months or More
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
Description  of Securities
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
Held to maturity
                                   
U.S. government sponsored enterprise MBS
 
$
6,507
   
$
8
   
$
1,657
   
$
6
   
$
8,164
   
$
14
 
U.S. SBA securities
   
     
     
2,883
     
6
     
2,883
     
6
 
Total investment securities – held to maturity
 
$
6,507
   
$
8
   
$
4,540
   
$
12
   
$
11,047
   
$
20
 
                                                 
Available for sale
 
                                               
U.S. government agency MBS
 
$
289
   
$
1
   
$
   
$
   
$
289
   
$
1
 
Total investment securities – available for sale
 
$
289
   
$
1
   
$
   
$
   
$
289
   
$
1
 
Total investment securities
 
$
6,796
   
$
9
   
$
4,540
   
$
12
   
$
11,336
   
$
21
 

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

11

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

Note 5: Loans Held for Investment

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

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


12

The following table sets forth information at March 31, 2020 regarding the dollar amount of loans held for investment that are contractually repricing during the periods indicated, segregated between adjustable rate loans and fixed rate loans.  Fixed-rate loans comprised one percent and two percent of loans held for investment at March 31, 2020 and June 30, 2019, respectively.  Adjustable rate loans having no stated repricing dates that reprice when the index they are tied to reprices (e.g. prime rate index) and checking account overdrafts are reported as repricing within one year.  The table does not include any estimate of prepayments which may cause the Corporation’s actual repricing experience to differ materially from that shown.

   
Adjustable Rate
             
(In Thousands)
 
Within One
Year
   
After
One Year
Through
3 Years
   
After
3 Years
Through
5 Years
   
After
5 Years
Through
10 Years
   
Fixed Rate
   
Total
 
Mortgage loans:
                                   
    Single-family
 
$
86,557
   
$
44,427
   
$
110,309
   
$
75,117
   
$
10,276
   
$
326,686
 
    Multi-family
   
149,627
     
160,236
     
154,391
     
11,523
     
164
     
475,941
 
    Commercial real estate
   
42,513
     
30,600
     
32,210
     
     
368
     
105,691
 
    Construction
   
4,902
     
     
     
     
1,444
     
6,346
 
Commercial business loans
   
100
     
     
     
     
402
     
502
 
Consumer loans
   
122
     
     
     
     
     
122
 
    Total loans held for investment,
       gross
 
$
283,821
   
$
235,263
   
$
296,910
   
$
86,640
   
$
12,654
   
$
915,288
 

The Corporation has developed an internal loan grading system to evaluate and quantify the Bank’s loans held for investment portfolio with respect to quality and risk.  Management continually evaluates the credit quality of the Corporation’s loan portfolio and conducts a quarterly review of the adequacy of the allowance for loan losses using quantitative and qualitative methods. The Corporation has adopted an internal risk rating policy in which each loan is rated for credit quality with a rating of pass, special mention, substandard, doubtful or loss.  The two primary components that are used during the loan review process to determine the proper allowance levels are individually evaluated allowances and collectively evaluated allowances.  Quantitative loan loss factors are developed by determining the historical loss experience, expected future cash flows, discount rates and collateral fair values, among others.  Qualitative loan loss factors are developed by assessing general economic indicators such as gross domestic product, retail sales, unemployment rates, employment growth, California home sales and median California home prices.  The Corporation assigns individual factors for the quantitative and qualitative methods for each loan category and each internal risk rating.

The Corporation categorizes all of the loans held for investment into risk categories based on relevant information about the ability of the borrower to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  A description of the general characteristics of the risk grades is as follows:
Pass - These loans range from minimal credit risk to average, but still acceptable, credit risk.  The likelihood of loss is considered remote.
Special Mention - A special mention loan has potential weaknesses that may be temporary or, if left uncorrected, may result in a loss.  While concerns exist, the bank is currently protected and loss is considered unlikely and not imminent.
Substandard - A substandard loan is inadequately protected by the current sound net worth and paying capacity of the borrower or of the collateral pledged, if any.  Loans so classified must have a well-defined weakness, or weaknesses, that may jeopardize the liquidation of the debt.  A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.


13

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

The following tables summarize gross loans held for investment, net of fair value adjustments, by loan types and risk category at the dates indicated:
    
March 31, 2020
 
(In Thousands)
 
Single-
family
   
Multi-
family
   
Commercial
Real Estate
   
Construction
   
Commercial Business
   
Consumer
   
Total
 
                                           
Pass
 
$
316,974
   
$
472,142
   
$
105,691
   
$
4,675
   
$
462
   
$
122
   
$
900,066
 
Special Mention
   
5,890
     
3,799
     
     
1,671
     
     
     
11,360
 
Substandard
   
3,822
     
     
     
     
40
     
     
3,862
 
Total loans held for
   investment, gross
 
$
326,686
   
$
475,941
   
$
105,691
   
$
6,346
   
$
502
   
$
122
   
$
915,288
 

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

The allowance for loan losses is maintained at a level sufficient to provide for estimated losses based on evaluating known and inherent risks in the loans held for investment and upon management’s continuing analysis of the factors underlying the quality of the loans held for investment.  These factors include changes in the size and composition of the loans held for investment, actual loan loss experience, current economic conditions, detailed analysis of individual loans for which full collectability may not be assured, and determination of the realizable value of the collateral securing the loans.  The provision (recovery) for (from) the allowance for loan losses is charged (credited) against operations on a quarterly basis, as necessary, to maintain the allowance at appropriate levels.  Although management believes it uses the best information available to make such determinations, there can be no assurance that regulators, in reviewing the Corporation’s loans held for investment, will not request a significant increase in its allowance for loan losses.  Future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly and adversely affected as a result of economic, operating, regulatory, and other conditions beyond the Corporation’s control.  In response to the novel corona virus of 2019 (“COVID-19”) pandemic, which has negatively impacted the current economic environment, a qualitative component was established in the allowance for loan losses methodology.

Non-performing loans are charged-off to their fair market values in the period the loans, or portion thereof, are deemed uncollectible, generally after the loan becomes 150 days delinquent for real estate secured first trust deed loans and 120 days delinquent for commercial business or real estate secured second trust deed loans.  For loans that were modified from their original terms, were re-underwritten and identified in the Corporation’s asset quality reports as troubled debt restructurings (“restructured loans”), the charge-off occurs when the loan becomes 90 days delinquent; and where borrowers file bankruptcy,

14

the charge-off occurs when the loan becomes 60 days delinquent.  The amount of the charge-off is determined by comparing the loan balance to the estimated fair value of the underlying collateral, less disposition costs, with the loan balance in excess of the estimated fair value charged-off against the allowance for loan losses.  The allowance for loan losses for non-performing loans is determined by applying ASC 310, “Receivables.”  For restructured loans that are less than 90 days delinquent, the allowance for loan losses are segregated into (a) individually evaluated allowances for those loans with applicable discounted cash flow calculations still in their restructuring period, classified lower than pass, and containing an embedded loss component or (b) collectively evaluated allowances based on the aggregated pooling method.  For non-performing loans less than 60 days delinquent where the borrower has filed bankruptcy, the collectively evaluated allowances are assigned based on the aggregated pooling method.  For non-performing commercial real estate loans, an individually evaluated allowance is derived based on the loan's discounted cash flow fair value (for restructured loans) or collateral fair value less estimated selling costs and if the fair value is higher than the loan balance, no allowance is required.

The following table is provided to disclose additional details for the periods indicated on the Corporation’s allowance for loan losses:
   
For the Quarter Ended
March 31,
   
For the Nine Months Ended
March 31,
 
(Dollars in Thousands)
 
2020
   
2019
   
2020
   
2019
 
                         
Allowance at beginning of period
 
$
6,921
   
$
7,061
   
$
7,076
   
$
7,385
 
                                 
Provision (recovery) for loan losses
   
874
     
4
     
671
     
(450
)
                                 
Recoveries:
                               
Mortgage loans:
                               
      Single-family
   
14
     
22
     
63
     
177
 
Consumer loans
   
1
     
1
     
2
     
2
 
   Total recoveries
   
15
     
23
     
65
     
179
 
                                 
Charge-offs:
                               
Mortgage loans:
                               
      Single-family
   
     
(6
)
   
(1
)
   
(31
)
Consumer loans
   
     
(2
)
   
(1
)
   
(3
)
   Total charge-offs
   
     
(8
)
   
(2
)
   
(34
)
                                 
   Net recoveries (charge-offs)
   
15
     
15
     
63
     
145
 
      Balance at end of period
 
$
7,810
   
$
7,080
   
$
7,810
   
$
7,080
 
                                 
Allowance for loan losses as a percentage of gross
  loans held for investment at the end of the period
   
0.85
%
   
0.79
%
   
0.85
%
   
0.79
%
Net (recoveries) charge-offs as a percentage of average
  loans receivable, net, during the period (annualized)
   
(0.01
)%
   
(0.01
)%
   
(0.01
)%
   
(0.02
)%


15

The following tables denote the past due status of the Corporation's gross loans held for investment, net of fair value adjustments, at the dates indicated.
    
March 31, 2020
 
(In Thousands)
 
Current
   
30-89 Days
Past Due
   
Non-Accrual (1)
   
Total Loans Held for Investment, Gross
 
                         
Mortgage loans:
                       
Single-family
 
$
320,104
   
$
2,760
   
$
3,822
   
$
326,686
 
Multi-family
   
475,941
     
     
     
475,941
 
Commercial real estate
   
105,691
     
     
     
105,691
 
Construction
   
6,346
     
     
     
6,346
 
Commercial business loans
   
462
     
     
40
     
502
 
Consumer loans
   
118
     
4
     
     
122
 
Total loans held for investment, gross
 
$
908,662
   
$
2,764
   
$
3,862
   
$
915,288
 

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

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

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


16

The following tables summarize the Corporation’s allowance for loan losses and recorded investment in gross loans, by portfolio type, at the dates and for the periods indicated.
   
Quarter Ended March 31, 2020
 
(In Thousands)
 
Single-
family
   
Multi-
family
   
Commercial
Real Estate
   
Construction
   
Commercial
Business
   
Consumer
   
Total
 
Allowance for loan losses:
                                         
Allowance at beginning of  period
 
$
2,157
   
$
3,502
   
$
1,058
   
$
168
   
$
28
   
$
8
   
$
6,921
 
Provision (recovery) for loan losses
   
431
     
456
     
3
     
(12
)
   
(2
)
   
(2
)
   
874
 
Recoveries
   
14
     
     
     
     
     
1
     
15
 
Charge-offs