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, 20182019

[     ]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'sRegistrant’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 classTrading Symbol(s)Name of each exchange on which registered
Common stock, par value $0.01 per sharePROVThe 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  X   [  ] 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     X   [  ] 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“large accelerated filer," "accelerated” “accelerated filer," "smaller” “smaller reporting company,"” and "emerging“emerging growth company"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    [   ]

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  X .

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer'sissuer’s classes of common stock, as of the latest practicable date.  As of October 31, 2019 there were 7,497,682 shares of the registrant's common stock, $0.01 par value per share, outstanding.
Title of class:
As of November 2, 2018
Common stock, $ 0.01 par value, per share7,506,855 shares

PROVIDENT FINANCIAL HOLDINGS, INC.
Table of Contents
PART 1  -FINANCIAL INFORMATIONPage
    
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, 20182019 and June 30, 201820191
 Condensed Consolidated Statements of Operations 
  for the Quarters Ended September 30, 20182019 and 201720182
 Condensed Consolidated Statements of Comprehensive Income 
  for the Quarters Ended September 30, 20182019 and 201720183
 Condensed Consolidated Statements of Stockholders'Stockholders’ Equity 
  for the Quarters Ended September 30, 20182019 and 201720184
 Condensed Consolidated Statements of Cash Flows 
  for the Three Months Ended September 30, 20182019 and 201720185
 Notes to Unaudited Interim Condensed Consolidated Financial Statements6
    
ITEM 2  -Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations: 
    
 General 4234
 Safe-Harbor Statement 4335
 Critical Accounting Policies 4436
 Executive Summary and Operating Strategy 4436
 Off-Balance Sheet Financing Arrangements and Contractual Obligations 4537
 Comparison of Financial Condition at September 30, 20182019 and June 30, 20182019 4638
 Comparison of Operating Results
for the-the Quarters Ended September 30, 20182019 and 20172018 4840
 Asset Quality 5446
 Loan Volume Activities 6249
 Liquidity and Capital Resources 6349
 Supplemental Information 6551
    
ITEM 3  -Quantitative and Qualitative Disclosures about Market Risk 6552
    
ITEM 4  -Controls and Procedures 6956
    
PART II  -OTHER INFORMATION 
    
ITEM 1  -Legal Proceedings 7056
ITEM 1A -Risk Factors 7057
ITEM 2  -Unregistered Sales of Equity Securities and Use of Proceeds 7057
ITEM 3  -Defaults Upon Senior Securities 7057
ITEM 4  -Mine Safety Disclosures  7157
ITEM 5  -Other Information  7157
ITEM 6  -Exhibits  7158
    
SIGNATURES  7359

.

.
PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Financial Condition
(Unaudited)
In Thousands, Except Share Information
  September 30,
2019		  June 30,
2019		 
Assets      
   Cash and cash equivalents $54,515  $70,632 
   Investment securities – held to maturity, at cost  85,088   94,090 
   Investment securities – available for sale, at fair value  5,517   5,969 
   Loans held for investment, net of allowance for loan losses of
   $6,929 and $7,076, respectively; includes $4,386 and $5,094 at fair value, respectively
  924,314   879,925 
   Accrued interest receivable  3,380   3,424 
   Federal Home Loan Bank (“FHLB”) – San Francisco stock  8,199   8,199 
   Premises and equipment, net  11,215   8,226 
   Prepaid expenses and other assets  13,068   14,385 
         
             Total assets $1,105,296  $1,084,850 
         
Liabilities and Stockholders’ Equity        
         
Liabilities:        
   Non interest-bearing deposits $85,338  $90,184 
   Interest-bearing deposits  746,398   751,087 
             Total deposits  831,736   841,271 
         
   Borrowings  131,092   101,107 
   Accounts payable, accrued interest and other liabilities  20,299   21,831 
             Total liabilities  983,127   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;
   18,091,865 and 18,081,365 shares issued; 7,479,682 and
   7,486,106 shares outstanding, respectively)
  181   181 
   Additional paid-in capital  94,795   94,351 
   Retained earnings  192,354   190,839 
   Treasury stock at cost (10,612,183 and 10,559,259 shares, respectively)  (165,309)  (164,891)
   Accumulated other comprehensive income, net of tax  148   161 
         
             Total stockholders’ equity  122,169   120,641 
         
             Total liabilities and stockholders’ equity $1,105,296  $1,084,850 
  
September 30,
2018
  
June 30,
2018
 
Assets      
   Cash and cash equivalents $78,928  $43,301 
   Investment securities – held to maturity, at cost  79,611   87,813 
   Investment securities – available for sale, at fair value  7,033   7,496 
   Loans held for investment, net of allowance for loan losses of
  $7,155 and $7,385, respectively; includes $4,945 and $5,234 at fair value, respectively
  877,091   902,685 
   Loans held for sale, at fair value  78,794   96,298 
   Accrued interest receivable  3,350   3,212 
   Real estate owned, net  524   906 
   Federal Home Loan Bank ("FHLB") – San Francisco stock  8,199   8,199 
   Premises and equipment, net  8,779   8,696 
   Prepaid expenses and other assets  15,171   16,943 
         
          Total assets $1,157,480  $1,175,549 
         
Liabilities and Stockholders' Equity        
         
Liabilities:        
   Non interest-bearing deposits $87,250  $86,174 
   Interest-bearing deposits  814,862   821,424 
          Total deposits  902,112   907,598 
         
   Borrowings  111,149   126,163 
   Accounts payable, accrued interest and other liabilities  22,539   21,331 
          Total liabilities  1,035,800   1,055,092 
         
Commitments and Contingencies        
         
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;
  18,048,115 and 18,033,115 shares issued; 7,500,860 and
  7,421,426 shares outstanding, respectively)
  181   181 
   Additional paid-in capital  95,795   94,957 
   Retained earnings  191,399   190,616 
   Treasury stock at cost (10,547,255 and 10,611,689 shares, respectively)  (165,884)  (165,507)
   Accumulated other comprehensive income, net of tax  189   210 
         
          Total stockholders' equity  121,680   120,457 
         
          Total liabilities and stockholders' equity $1,157,480  $1,175,549 

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

1

PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
In Thousands, Except Per Share Information
.
 
Quarter Ended
September 30,
  Quarter Ended
September 30,		 
 2018  2017  2019  2018 
Interest income:            
Loans receivable, net $10,174  $10,157  $10,075  $10,174 
Investment securities  345   257  614  345 
FHLB – San Francisco stock  143   141  143  143 
Interest-earning deposits  338   190   246   338 
Total interest income  11,000   10,745  11,078  11,000 
              
Interest expense:              
Checking and money market deposits  108   103  110  108 
Savings deposits  151   149  134  151 
Time deposits  621   639  532  621 
Borrowings  763   736   720   763 
Total interest expense  1,643   1,627  1,496  1,643 
                
Net interest income  9,357   9,118  9,582  9,357 
(Recovery) provision for loan losses  (237)  169 
Net interest income, after (recovery) provision for loan losses  9,594   8,949 
Provision (recovery) for loan losses  (181)  (237)
Net interest income, after provision (recovery) for loan losses 9,763  9,594 
              
Non-interest income:              
Loan servicing and other fees  324   363  133  324 
Gain on sale of loans, net  3,132   4,847 
Gain (loss) on sale of loans, net (86) 3,132 
Deposit account fees  505   558  447  505 
Gain (loss) on sale and operations of real estate owned acquired in the settlement of loans, net  1   (40)
Card and processing fees  398   381  390  398 
Other  189   243   186   190 
Total non-interest income  4,549   6,352  1,070  4,549 
              
Non-interest expense:              
Salaries and employee benefits  8,250   9,269  4,985  8,250 
Premises and occupancy  1,345   1,314  878  1,345 
Equipment  421   362  279  421 
Professional expenses  447   520  408  447 
Sales and marketing expenses  169   203  117  169 
Deposit insurance premiums and regulatory assessments  165   184  (16) 165 
Other(1)
  907   3,882 
Other  587   907 
Total non-interest expense  11,704   15,734  7,238  11,704 
                
Income (loss) before income taxes  2,439   (433)
Provision (benefit) for income taxes  616   (208)
Net income (loss) $1,823  $(225)
Income before income taxes 3,595  2,439 
Provision for income taxes  1,033   616 
Net income $2,562  $1,823 
              
Basic earnings (loss) per share $0.25  $(0.03)
Diluted earnings (loss) per share $0.24  $(0.03)
Basic earnings per share $0.34  $0.25 
Diluted earnings per share $0.33  $0.24 
Cash dividends per share $0.14  $0.14  $0.14  $0.14 

(1) Includes $2.75 millionThe accompanying notes are an integral part of litigation settlement expense for the quarter ended September 30, 2017.these condensed consolidated financial statements.
2
2

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

  
For the Quarters Ended
September 30,
 
  2018  2017 
Net income (loss) $1,823  $(225)
         
Change in unrealized holding (loss) gain on securities available for sale  (30)  2 
Reclassification of (gains) losses to net income  —   — 
Other comprehensive (loss) income, before income taxes  (30)  2 
         
Income tax (benefit) provision  (9)  1 
Other comprehensive (loss) income  (21)  1 
         
Total comprehensive income (loss) $1,802  $(224)
  For the Quarters
Ended September 30,
 
  2019  2018 
Net income $2,562  $1,823 
         
Change in unrealized holding loss on securities available for sale  (18)  (30)
Reclassification adjustment for net income (loss) on securities  —   — 
Other comprehensive loss, before income taxes  (18)  (30)
         
Income tax benefit  (5)  (9)
Other comprehensive loss  (13)  (21)
         
Total comprehensive income $2,549  $1,802 









The accompanying notes are an integral part of these condensed consolidated finanicalfinancial statements.
3
3

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

For the Quarters Ended September 30, 20182019 and 2017:2018:
  
Common
Stock
  Additional        
Accumulated
Other
Comprehensive
    
  Shares  Amount  
Paid-In
Capital
  
 Retained
Earnings
  Treasury Stock  
Income (Loss),
Net of Tax
  Total 
Balance at June 30, 2018  7,421,426  $181  $94,957  $190,616  $(165,507) $210  $120,457 
                             
Net income              1,823           1,823 
Other comprehensive loss                      (21)  (21)
Purchase of treasury stock(1)
  (20,566)              (377)      (377)
Exercise of stock options  15,000       153               153 
Distribution of restricted stock 85,000                       — 
Amortization of restricted stock         364               364 
Stock options expense          321               321 
Cash dividends(2)
              (1,040)          (1,040)
                             
Balance at September 30, 2018 7,500,860  $181  $95,795  $191,399  $(165,884) $189  $121,680 

 
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             2,562           2,562 
Other comprehensive loss                     (13)  (13)
Purchase of treasury stock(1)
 (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.


 
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             1,823           1,823 
Other comprehensive loss                     (21)  (21)
Purchase of treasury stock(1)
 (20,566)              (377)      (377)
Exercise of stock options 15,000       153               153 
Distribution of restricted stock 85,000                       — 
Amortization of restricted stock         364               364 
Stock options expense         321               321 
Cash dividends(2)
             (1,040)          (1,040)
                            
Balance at September 30, 2018 7,500,860  $181  $95,795  $191,399  $(165,884)
 $189  $121,680 

(1)
Includes the repurchase of 20,566 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, 2018.

  
Common
Stock
  Additional         
Accumulated
Other
Comprehensive
    
  Shares  Amount  
Paid-In
Capital
  
Retained
Earnings
  Treasury Stock  
Income,
Net of Tax
  Total 
Balance at June 30, 2017  7,714,052  $180  $93,209  $192,754  $(158,142) $229  $128,230 
                             
Net loss              (225)          (225)
Other comprehensive income                      1   1 
Purchase of treasury stock  (126,000)              (2,450)      (2.450)
Exercise of stock options  21,500       177               177 
Amortization of restricted stock         149               149 
Forfeiture of restricted stock          17       (17)      — 
Stock options expense          117               117 
Cash dividends(1)
              (1,078)          (1,078)
                             
Balance at September 30, 2017 7,609,552  $180  $93,669  $191,451  $(160,609) $230  $124,921 
(1)
Cash dividends of $0.14 per share were paid in the quarter ended September 30, 2017.
The accompanying notes are an integral part of these condensed consolidated finanicalfinancial statements.
44

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

 
Three Months Ended
September 30,
  
Three Months Ended
September 30,
 
 2018  2017  2019  2018 
Cash flows from operating activities:            
Net income (loss) $1,823  $(225)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating
activities:
        
Net income $2,562  $1,823 
Adjustments to reconcile net income to net cash (used for) provided by operating activities:      
Depreciation and amortization  928   664  790  928 
(Recovery) provision for loan losses  (237)  169 
Recovery of losses on real estate owned  —   (552)
Gain on sale of loans, net  (3,132)  (4,847)
(Gain) loss on sale of real estate owned, net  (13)  580 
Provision (recovery) for loan losses (181) (237)
(Gain) loss on sale of loans, net 86  (3,132)
Stock-based compensation  685   266  240  685 
Provision (benefit) for deferred income taxes  505   (930)
Increase in accounts payable, accrued interest and other liabilities  2,446   1,039 
Decrease in prepaid expenses and other assets  1,172   617 
Provision for deferred income taxes 1,173  505 
(Decrease) increase in accounts payable, accrued interest and other liabilities (1,591) 2,446 
(Increase) decrease in prepaid expenses and other assets (3,288) 1,159 
Loans originated for sale  (196,321)  (392,292) —  (196,321)
Proceeds from sale of loans  215,761   386,799   —   215,761 
Net cash provided by (used for) operating activities  23,617   (8,712)
Net cash (used for) provided by operating activities (209) 23,617 
              
Cash flows from investing activities:              
Decrease (increase) in loans held for investment, net  25,927   (3,517)
(Increase) decrease in loans held for investment, net (44,368) 25,927 
Maturity of investment securities held to maturity  200   —  —  200 
Principal payments from investment securities held to maturity  7,915   5,570  8,872  7,915 
Principal payments from investment securities available for sale  432   383  436  432 
Purchase of investment securities held to maturity  (200)  (10,102) —  (200)
Proceeds from sale of real estate owned  395   1,587  —  395 
Purchase of premises and equipment  (307)  (901)  (10)  (307)
Net cash provided by (used for) investing activities  34,362   (6,980)
Net cash (used for) provided by investing activities (35,070) 34,362 
              
Cash flows from financing activities:              
(Decrease) increase in deposits, net  (5,486)  495 
Decrease in deposits, net (9,535) (5,486)
Repayments of short-term borrowings, net  (15,000)  (5,000) —  (15,000)
Repayments of long-term borrowings  (14)  (20) (15) (14)
Proceeds from long-term borrowings 30,000  — 
Exercise of stock options  153   177  132  153 
Withholding taxes on stock based compensation  (588)  (41) (27) (588)
Cash dividends  (1,040)  (1,078) (1,047) (1,040)
Treasury stock purchases  (377)  (2,450)  (346)  (377)
Net cash used for financing activities  (22,352)  (7,917)
Net cash provided by (used for) financing activities 19,162  (22,352)
                
Net increase (decrease) in cash and cash equivalents  35,627   (23,609)
Net (decrease) increase in cash and cash equivalents (16,117) 35,627 
Cash and cash equivalents at beginning of period  43,301   72,826   70,632   43,301 
Cash and cash equivalents at end of period $78,928  $49,217  $54,515  $78,928 
Supplemental information:              
Cash paid for interest $1,623  $1,606  $1,475  $1,623 
Cash paid for income taxes $—  $— 
Transfer of loans held for sale to held for investment $724  $521  $566  $724 
Real estate acquired in the settlement of loans $—  $—
 


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

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

September 30, 20182019

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, 20182019 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"“Bank”) (collectively, the "Corporation"“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"(“GAAP”) have been omitted pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC"(“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'sCorporation’s Annual Report on Form 10-K for the year ended June 30, 2018.2019.  The results of operations for the quarter ended September 30, 20182019 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2019.2020.


Note 2: Accounting Standard Updates ("ASU"(“ASU”)

There have been no accounting standard updates or changes in the status of their adoption that are significant to the Corporation as previously disclosed in Note 1 of the Corporation's Annual Report on Form 10-K for the year ended June 30, 2018,2019, other than:

ASU 2014-09:2016-13:
In May 2014,June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, "Revenue from Contracts with Customers," which created FASB Accounting Standards Codification (ASC) Topic 606 ("ASC 606"). ASC 606 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction priceCredit Losses on Financial Instruments,” and subsequent amendment to the performance obligationsinitial guidance in November 2018, ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, in April 2019, ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and in May 2019, ASU 2019-05 Financial Instruments—Credit Losses, Topic 326, all of which clarifies codification and corrects unintended application of the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASC 606 wasguidance. These ASUs will be effective for annual periods, and interim reporting periods within those annual periods,fiscal years beginning after December 15, 2017.2022, including interim periods within those fiscal years assuming the adoption of an ASU implementing the FASB board decision in October 2019 extending the adoption date for certain registrants, including the Corporation. The Corporation adopted ASC 606 on July 1, 2018 usingis evaluating its current expected loss methodology of its loan and investment portfolios to identify the modified retrospective approach. Therefore, the comparative information has not been adjustednecessary modifications in accordance with these standards and continues to be reported under superseded ASC 605. There was no cumulative effect adjustment as of July 1, 2018, and there were no material changes to the timing or amount of revenue recognized for the three months ended September 30, 2018; however, additional disclosures were incorporatedexpects a change in the footnotesprocesses 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 majorityCorporation is in the process of the Company's revenue is comprised of interest income from financial assets, which is explicitly excluded from the scope of ASC 606. The Corporation electedcompiling historical data that will be used to apply the practical expedient pursuantcalculate expected credit losses on its loan portfolio to ASC 606 and therefore does not disclose information about remaining performance obligations that have an original expected term of one year or less and allowsensure the Corporation to expense costs related to obtaining a contract as incurred whenis fully compliant with these ASUs at the original amortization period wouldadoption date and is evaluating the potential impact adoption of this ASU will have been one year or less. See Note 12 for additional discussion.

6
on the Corporation’s Consolidated Financial Statements.

ASU 2018-11
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." This ASU introduces a lessee model that brings most leases ononto the balance sheet and aligns many of the underlying principles of the new lessor model with those in the new revenue recognition standard, ASC 606, Revenue From Contracts With Customers. The new leases standard represents a
6
wholesale change to lease accounting and will most likelydid not result in significant implementation challenges during the transition periodperiod. 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 beyond. Thislease 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 will be effective for annual periods is beginning after December 15, 2018 (i.e., calendar periods beginning on January 1, 2019), and interim periods therein, early adoption is permitted.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 plans to adoptadopted the provisions of ASC 842 effective July 1, 2019 utilizing the transition method allowed under ASU 2018-11 on July 1, 2019. Managementand 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 currently assessing the impactor contains a lease. The Corporation also elected to not recognize lease assets and lease liabilities for leases with an initial term of ASU 2016-02 on the Corporation's financial position and results of operations but does not believe that12 months or less. The adoption of ASU 2018-11 willASC 842 did not have a material impact on its consolidated financial statements. See Note 10 for additional discussion.

ASU 2018-132018-13:
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework -– Changes to the Disclosure Requirements for Fair Value Measurement, which modifies disclosure requirements on fair value measurements to improve their effectiveness. The guidance permits entities to consider materiality when evaluating fair value measurement disclosures and, among other modifications, requires certain new disclosures related to Level 3 fair value measurements. The guidance will be effective beginning January 1, 2020, with early adoption permitted. The guidance only affects disclosures in the notes to the consolidated financial statements and will not otherwise affect the Corporation's financial position or results of operations.Corporation’s Consolidated Financial Statements.


Note 3: Earnings (Loss) Per Share

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

As of September 30, 20182019 and 2017,2018, there were outstanding options to purchase 514,000560,250 shares and 591,250514,000 shares of the Corporation'sCorporation’s common stock, respectively. Of those shares, as of September 30, 20182019 and 2017,2018, there were 20,000no shares and 591,25020,000 shares, respectively, which were excluded from the diluted EPS computation as their effect was anti-dilutive.  As of September 30, 2019 and 2018, there were outstanding restricted stock awards of 225,500 shares and 13,500 shares, which have a dilutive effect in the first quarter of fiscal 2019; and as of September 30, 2017, there were outstanding restricted stock awards of 109,000 shares with no dilutive effect in the first quarter of fiscal 2018.respectively.


7
7

The following table provides the basic and diluted EPS computations for the quarters ended September 30, 20182019 and 2017,2018, respectively.
 For the Quarters Ended
September 30,		 
(In Thousands, Except Earnings Per Share) 
For the Quarters Ended
September 30,
  2019  2018 
 2018  2017 
Numerator:            
Net income (loss) – numerator for basic earnings per share and diluted earnings per share -
available to common stockholders
 $1,823  $(225) 
Net income – numerator for basic earnings per share and diluted earnings per share - available
to common stockholders
 $
2,562  $1,823 
               
Denominator:               
Denominator for basic earnings per share:               
Weighted-average shares  7,431   7,694   7,482  7,431 
               
Effect of dilutive shares:               
Stock options  91   —   136  91 
Restricted stock  35   —    30   35 
               
Denominator for diluted earnings per share:               
Adjusted weighted-average shares and assumed conversions  7,557   7,694    7,648   7,557 
               
Basic earnings (loss) per share $0.25  $(0.03) 
Diluted earnings (loss) per share $0.24  $(0.03) 
Basic earnings per share $
0.34  $0.25 
Diluted earnings per share $
0.33  $0.24 

8

Note 4: Operating Segment Reports

The Corporation operates in two business segments: community banking through the Bank and mortgage banking through Provident Bank Mortgage ("PBM"), a division of the Bank.
The following tables set forth condensed consolidated statements of operations and total assets for the Corporation's operating segments for the quarters ended September 30, 2018 and 2017, respectively.
  For the Quarter Ended September 30, 2018 
(In Thousands) 
Provident
Bank
  
Provident
Bank
Mortgage
  
Consolidated
Totals
 
Net interest income $9,000  $357  $9,357 
(Recovery) provision for loan losses  (332)  95   (237)
Net interest income, after (recovery) provision for loan losses  9,332   262   9,594 
             
Non-interest income:            
     Loan servicing and other fees (1)
  133   191   324 
     Gain on sale of loans, net (2)
  34   3,098   3,132 
     Deposit account fees  505   —   505 
     Gain on sale and operations of real estate owned
        acquired in the settlement of loans, net
  1   —   1 
     Card and processing fees  398   —   398 
     Other  189   —   189 
            Total non-interest income  1,260   3,289   4,549 
             
Non-interest expense:            
     Salaries and employee benefits  4,836   3,414   8,250 
     Premises and occupancy  908   437   1,345 
     Operating and administrative expenses  926   1,183   2,109 
            Total non-interest expense  6,670   5,034   11,704 
Income (loss) before income taxes  3,922   (1,483)  2,439 
Provision (benefit) for income taxes  1,055   (439)  616 
Net income (loss) $2,867  $(1,044) $1,823 
Total assets, end of period $1,078,441  $79,039  $1,157,480 
(1)
Includes an inter-company charge of $168 credited to PBM by the Bank during the period to compensate PBM for originating loans held for investment.
(2)
Includes an inter-company charge of $6 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.
9
  For the Quarter Ended September 30, 2017 
(In Thousands) 
Provident
Bank
  
Provident
Bank
Mortgage
  
Consolidated
Totals
 
Net interest income $8,550  $568  $9,118 
Provision for loan losses  169   —   169 
Net interest income after provision for loan losses  8,381   568   8,949 
             
Non-interest income:            
     Loan servicing and other fees (1)
  47   316   363 
     Gain on sale of loans, net (2)
  —   4,847   4,847 
     Deposit account fees  558   —   558 
     Loss on sale and operations of real estate owned
        acquired in the settlement of loans, net
  (40)  —   (40)
     Card and processing fees  381   —   381 
     Other  243   —   243 
            Total non-interest income  1,189   5,163   6,352 
             
Non-interest expense:            
     Salaries and employee benefits  4,502   4,767   9,269 
     Premises and occupancy  827   487   1,314 
     Operating and administrative expenses  2,251   2,900   5,151 
            Total non-interest expense  7,580   8,154   15,734 
Income (loss) before income taxes  1,990   (2,423)  (433)
Provision (benefit) for income taxes  811   (1,019)  (208)
Net income (loss) $1,179  $(1,404) $(225)
Total assets, end of period $1,066,294  $127,492  $1,193,786 
(1)
Includes an inter-company charge of $240 credited to PBM by the Bank during the period to compensate PBM for originating loans held for investment.
(2)
Includes an inter-company charge of $59 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.


10
Note 5:4: Investment Securities

The amortized cost and estimated fair value of investment securities as of September 30, 20182019 and June 30, 20182019 were as follows:
September 30, 2018 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
(Losses)
  
Estimated
Fair
Value
  
Carrying
Value
 
September 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 (1)
 $76,051  $215  $(835) $75,431  $76,051  $81,412  $1,238  $(41) $
82,609  $81,412 
U.S. SBA securities (2)
  2,960   —   (17)  2,943   2,960  2,876  —  (13) 2,863  2,876 
Certificate of deposits  600   —   —   600   600   800   —   —   800   800 
Total investment securities - held to maturity $79,611  $215  $(852) $78,974  $79,611  $85,088  $1,238  $(54) $
86,272  $85,088 
                                   
Available for sale:                                   
U.S. government agency MBS $4,024  $132  $—  $4,156  $4,156  $3,303  $110  $—  $
3,413  $3,413 
U.S. government sponsored enterprise MBS  2,451   110   —   2,561   2,561  1,773  78  —  1,851  1,851 
Private issue CMO (3)
  313   3   —   316   316   245   8   —   253   253 
Total investment securities - available for sale $6,788  $245  $—  $7,033  $7,033  $5,321  $196  $—  $
5,517  $5,517 
Total investment securities $86,399  $460  $(852) $86,007  $86,644  $90,409  $1,434  $(54) $
91,789  $90,605 

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

8
June 30, 2018 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
(Losses)
  
Estimated
Fair
Value
  
Carrying
Value
 
(In Thousands)               
Held to maturity:               
   U.S. government sponsored enterprise MBS $84,227  $203  $(762) $83,668  $84,227 
   U.S. SBA securities  2,986   —   (15)  2,971   2,986 
   Certificate of deposits  600   —   —   600   600 
Total investment securities - held to maturity $87,813  $203  $(777) $87,239  $87,813 
                     
Available for sale:                    
   U.S. government agency MBS $4,234  $150  $—  $4,384  $4,384 
   U.S. government sponsored enterprise MBS  2,640   122   —   2,762   2,762 
   Private issue CMO  346   4   —   350   350 
Total investment securities - available for sale $7,220  $276  $—  $7,496  $7,496 
Total investment securities $95,033  $497  $(777) $94,735  $95,309 
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 first quarters of fiscal 20192020 and 2018,2019, the Corporation received MBS principal payments of $8.3$9.3 million and $6.0$8.3 million, respectively, and there were no sales or purchases of investment securities during these periods.  The Corporation did not purchase any investment securities in the first quarter of fiscal 2019; while the Corporation purchased U.S. government sponsored enterprise MBS totaling $10.1 million, to be held to maturity, during the first quarter of fiscal 2018.

11
The Corporation held investments with an unrealized loss position of $852,000$54,000 at September 30, 20182019 and $777,000$21,000 at June 30, 2018.2019.
As of September 30, 2018 
Unrealized Holding
Losses
  
Unrealized Holding
Losses
  
Unrealized Holding
Losses
 
As of September 30, 2019 
Unrealized Holding
Losses
  
Unrealized Holding
Losses
  
Unrealized Holding
Losses
 
(In Thousands) Less Than 12 Months  12 Months or More  Total  Less Than 12 Months  12 Months or More  Total 
 Fair  Unrealized  Fair  Unrealized  Fair  Unrealized  Fair  Unrealized  Fair  Unrealized  Fair  Unrealized 
Description of Securities Value  Losses  Value  Losses  Value  Losses  Value  Losses  Value  Losses  Value  Losses 
Held to maturity:                                    
U.S. government sponsored enterprise MBS $16,232  $264  $26,623  $571  $42,855  $835  $7,312  $39  $1,478  $2  $
8,790  $41 
U.S. SBA securities  2,936   17   —   —   2,936   17   —  $—   2,855   13   2,855   13 
Total investment securities $19,168  $281  $26,623  $571  $45,791  $852  $7,312  $39  $4,333  $15  $
11,645  $54 

As of June 30, 2018
Unrealized Holding
Losses
 
Unrealized Holding
Losses
 
Unrealized Holding
Losses
 
(In Thousands)Less Than 12 Months 12 Months or More Total 
 Fair Unrealized Fair Unrealized Fair Unrealized 
Description  of SecuritiesValue Losses Value Losses Value Losses 
Held to maturity:            
   U.S. government sponsored enterprise MBS $47,045  $762  $—  $—  $47,045  $762 
   U.S. SBA securities  2,964   15   —   —   2,964   15 
Total investment securities $50,009  $777  $—  $—  $50,009  $777 
9
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 September 30, 2018, $571,0002019, $15,000 of the total $852,000$54,000 unrealized holding losses were more than 12 months;months or more; while at June 30, 2018, all2019, $12,000 of the $21,000 unrealized holding loss was less thanlosses were 12 months.months or more. The Corporation does not believe that there were any other-than-temporary impairments on the investment securities at September 30, 20182019 and 2017;2018; therefore, no impairment losses were recorded for the quarters ended September 30, 20182019 and 2017.
12
2018.

Contractual maturities of investment securities as of September 30, 20182019 and June 30, 20182019 were as follows:
  September 30, 2019  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  28,616   28,734   32,584   32,728 
Due after five through ten years  32,703   33,447   35,306   36,090 
Due after ten years  22,969   23,291   25,800   26,141 
Total investment securities - held to maturity $85,088  $86,272  $
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  5,321   5,517   5,757   5,969 
Total investment securities - available for sale $5,321  $5,517  $
5,757  $5,969 
Total investment securities $90,409  $91,789  $
99,847  $101,328 
  September 30, 2018  June 30, 2018 
(In Thousands) 
Amortized
Cost
  
Estimated
Fair
Value
  
Amortized
Cost
  
Estimated
Fair
Value
 
             
Held to maturity:            
Due in one year or less $600  $600  $600  $600 
Due after one through five years  29,549   28,969   24,961   24,569 
Due after five through ten years  14,141   13,886   22,847   22,477 
Due after ten years  35,321   35,519   39,405   39,593 
Total investment securities - held to maturity $79,611  $78,974  $87,813  $87,239 
                 
Available for sale:                
Due in one year or less $—  $—  $—  $— 
Due after one through five years  —   —   —   — 
Due after five through ten years  —   —   —   — 
Due after ten years  6,788   7,033   7,220   7,496 
Total investment securities - available for sale $6,788  $7,033  $7,220  $7,496 
Total investment securities $86,399  $86,007  $95,033  $94,735 

10

Note 6:5: Loans Held for Investment

Loans held for investment, net of fair value adjustments, consisted of the following:
(In Thousands) 
September 30,
2018
  
June 30,
2018
  September 30,
2019		  June 30,
2019		 
Mortgage loans:            
Single-family $307,480  $314,808  $328,332  $324,952 
Multi-family  454,821   476,008  479,597  439,041 
Commercial real estate  112,026   109,726  110,652  111,928 
Construction(1)  8,956   7,476  5,912  4,638 
Other  167   167  —  167 
Commercial business loans (1)(2)
  416   500  368  478 
Consumer loans (2)(3)
  104   109   144   134 
Total loans held for investment, gross  883,970   908,794  925,005  881,338 
              
Undisbursed loan funds (3)
  (5,110)  (4,302)
Advance payments of escrows  3   18  34  53 
Deferred loan costs, net  5,383   5,560  6,204  5,610 
Allowance for loan losses  (7,155)  (7,385)  (6,929)  (7,076)
Total loans held for investment, net $877,091  $902,685  $924,314  $879,925 


(1)
Net of $1.5$6.2 million and $495$6.6 million of undisbursed loan funds as of September 30, 2019 and June 30, 2019, respectively
(2)
Net of $1.1 million and $1.0 million of undisbursed lines of credit as of September 30, 20182019 and June 30, 2018,2019, respectively.
(2)(3)
Net of $497$0.5 million and $503$0.5 million of undisbursed lines of credit as of September 30, 20182019 and June 30, 2018,2019, respectively.
(3)
Comprised solely of undisbursed construction loan funds.
13

The following table sets forth information at September 30, 20182019 regarding the dollar amount of loans held for investment that are contractually repricing during the periods indicated, segregated between adjustable rate loans and fixed rate loans.  Fixed-rate loans comprised 2%one percent and two percent of loans held for investment at both September 30, 20182019 and June 30, 2018.2019, 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'sCorporation’s actual repricing experience to differ materially from that shown.

 Adjustable Rate        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  
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 $116,585  $28,559  $93,276  $57,120  $11,940  $307,480  $91,793  $41,361  $119,810  $64,197  $11,171  $328,332 
Multi-family  130,379   161,337   148,803   14,093   209   454,821  125,583  179,261  157,529  17,044  180  479,597 
Commercial real estate  32,602   43,629   35,269   —   526   112,026  43,813  31,233  34,408  775  423  110,652 
Construction  7,273   —   —   —   1,683   8,956  5,085  —  —  —  827  5,912 
Other  —   —   —   —   167   167 
Commercial business loans  42   —   —   —   374   416  20  —  —  —  348  368 
Consumer loans  104   —   —   —   —   104   144   —   —   —   —   144 
Total loans held for investment,
gross
 $286,985  $233,525  $277,348  $71,213  $14,899  $883,970  $266,438  $251,855  $311,747  $82,016  $12,949  $925,005 

11
The Corporation has developed an internal loan grading system to evaluate and quantify the Bank'sBank’s loans held for investment portfolio with respect to quality and risk.  Management continually evaluates the credit quality of the Corporation'sCorporation’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 soundnet 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.
14
▪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, 2018 September 30, 2019 
In Thousands)
Single-
family
  
Multi-
family
  Commercial Real Estate  Construction  
Other
Mortgage
  
Commercial
Business
 Consumer    Total
(In Thousands) 
Single-
family
  
Multi-
family
  
Commercial
Real Estate
  Construction  Commercial Business  Consumer  Total 
                                                   
Pass$298,414  $450,894  $112,026  $6,906  $167  $348  $104  $868,859 $321,107  $475,755  $109,726  $4,773  $323  $144  $911,828 
Special Mention 1,141   3,927   —   —   —   —   —   5,068 3,039  3,842  —  —  —  —  6,881 
Substandard 7,925   —   —   2,050   —   68   —   10,043  4,186   —   926   1,139   45   —   6,296 
Total loans held
for investment,
gross
$307,480  $454,821  $454,821  $8,956  $167  $416  $104  $883,970 $328,332  $479,597  $110,652  $5,912  $368  $144  $925,005 
 June 30, 2018
In Thousands)
Single-
family
  
Multi-
family
  Commercial Real Estate  Construction  
Other
Mortgage
  
Commercial
Business
    Consumer  Total
                               
Pass$304,619  $472,061  $108,786  $7,476  $167  $430  $109  $893,648
Special Mention 2,548   3,947   940   —   —   —   —   7,435
Substandard 7,641   —   —   —   —   70   —   7,711
   Total loans held
      for investment,
      gross
$314,808  $476,008  $109,726  $7,476  $167  $500  $109  $908,794

12
  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'smanagement’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'sCorporation’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'sCorporation’s control.

Non-performing loans are charged-off to their fair market values in the period the loans, or portion thereof, are deemed uncollectible, generally after the loan becomes 150 days delinquent for real estate secured first trust deed loans and 120 days delinquent for commercial business or real estate secured second trust deed loans.  For loans that were modified from their original terms, were re-underwritten and identified in the Corporation'sCorporation’s asset quality reports as troubled debt restructurings ("(“restructured loans"loans”), the charge-off occurs when the loan becomes 90 days delinquent; and where borrowers file bankruptcy, the charge-off occurs when the loan becomes 60 days delinquent.  The amount of the charge-off is determined by comparing the loan balance to the estimated fair value of the underlying collateral, less disposition costs, with the loan balance in excess of the estimated fair value charged-off against the allowance for loan losses.  The allowance for loan losses for non-performing loans
15
is determined by applying Accounting Standards Codification ("ASC"(“ASC”) 310, "Receivables."“Receivables.”  For restructured loans that are less than 90 days delinquent, the allowance for loan losses are segregated into (a) individually evaluated allowances for those loans with applicable discounted cash flow calculations still in their restructuring period, classified lower than pass, and  containing an embedded loss component or (b) collectively evaluated allowances based on the aggregated pooling method.  For non-performing loans less than 60 days delinquent where the borrower has filed bankruptcy, the collectively evaluated allowances are assigned based on the aggregated pooling method.  For non-performing commercial real estate loans, an individually evaluated allowance is derived based on the loan's discounted cash flow fair value (for restructured loans) or collateral fair value less estimated selling costs and if the fair value is higher than the loan balance, no allowance is required.

The following table summarizes the Corporation's allowance for loan losses at September 30, 2018 and June 30, 2018:
13
(In Thousands) September 30, 2018  June 30, 2018 
Collectively evaluated for impairment:      
   Mortgage loans:      
      Single-family $2,617  $2,632 
      Multi-family  3,336   3,492 
      Commercial real estate  1,012   1,030 
      Construction  38   47 
      Other  3   3 
   Commercial business loans  14   18 
   Consumer loans  6   6 
            Total collectively evaluated allowance  7,026   7,228 
         
Individually evaluated for impairment:        
   Mortgage loans:        
      Single-family  124   151 
   Commercial business loans  5   6 
            Total individually evaluated allowance  129   157 
Total loan loss allowance $7,155  $7,385 
16

The following table is provided to disclose additional details for the periods indicated on the Corporation'sCorporation’s allowance for loan losses:
 
For the Quarters Ended
September 30,
  For the Quarters Ended
September 30,		 
(Dollars in Thousands) 2018  2017  2019  2018 
            
Allowance at beginning of period $7,385  $8,039  $7,076  $7,385 
              
(Recovery) provision for loan losses  (237)  169 
Provision (recovery) for loan losses (181) (237)
              
Recoveries:              
Mortgage loans:              
Single-family  32   84  36  32 
Consumer loans  1   —   —   1 
Total recoveries  33   84  36  33 
              
Charge-offs:              
Mortgage loans:              
Single-family  (25)  (229) (1) (25)
Consumer loans  (1)  —   (1)  (1)
Total charge-offs  (26)  (229) (2) (26)
              
Net recoveries (charge-offs)  7   (145)
Net (charge-offs) recoveries  34   7 
Balance at end of period $7,155  $8,063  $6,929  $7,155 
              
Allowance for loan losses as a percentage of gross loans held for investment at the end of
the period
  0.81%  0.88% 0.74 % 0.81 %
Net (recoveries) charge-offs as a percentage of average loans receivable, net, during the
period (annualized)
  0.00%  0.06%
Net charge-offs (recoveries) as a percentage of average loans receivable, net, during the
period (annualized)
  (0.02)%  0.00 %

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, 2018  September 30, 2019 
(In Thousands) Current  
30-89 Days
Past Due
  
Non-Accrual (1)
  
Total Loans Held for
Investment, Gross
 Current  
30-89 Days
Past Due
  
Non-Accrual (1)
  Total Loans Held for Investment, Gross 
                        
Mortgage loans:                        
Single-family $301,055  $—  $6,425  $307,480  $323,159  $987  $4,186  $328,332 
Multi-family  454,821   —   —   454,821  479,597  —  —  479,597 
Commercial real estate  112,026   —   —   112,026  110,652  —  —  110,652 
Construction  6,906   —   2,050   8,956  4,773  —  1,139  5,912 
Other  167   —   —   167 
Commercial business loans  348   —   68   416  323  —  45  368 
Consumer loans  104   —   —   104   141   3   —   144 
Total loans held for investment, gross $875,427  $—  $8,543  $883,970  $918,645  $990  $5,370  $925,005 

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

14
17
 June 30, 2018  June 30, 2019 
(In Thousands) Current  
30-89 Days
Past Due
  
Non-Accrual (1)
  
Total Loans Held for
Investment, Gross 
 Current  
30-89 Days
Past Due
  
Non-Accrual(1)
  Total Loans Held for Investment, Gross 
                        
Mortgage loans:                        
Single-family $307,863  $804  $6,141  $314,808  $318,671  $660  $5,621  $324,952 
Multi-family  476,008   —   —   476,008  439,041  —  —  439,041 
Commercial real estate  109,726   —   —   109,726  111,928  —  —  111,928 
Construction  7,476   —   —   7,476  3,667  —  971  4,638 
Other  167   —   —   167  167  —  —  167 
Commercial business loans  430   —   70   500  429  —  49  478 
Consumer loans  108   1   —   109   129   5   —  134 
Total loans held for investment, gross $901,778  $805  $6,211  $908,794  $874,032  $665  $6,641  $881,338 

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

The following tables summarize the Corporation'sCorporation’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, 2018  Quarter Ended September 30, 2019
 
(In Thousands) 
Single-
family
  
Multi-
family
  
Commercial
Real Estate
  Construction  Other  
Commercial
Business
  Consumer  Total  
Single-
family
  
Multi-
family
  Commercial Real Estate  Construction  Other  Commercial Business  Consumer  Total 
Allowance for loan losses:                                                
Allowance at beginning of period $2,783  $3,492  $1,030  $47  $3  $24  $6  $7,385  $2,709  $3,219  $1,050  $61  $3  $26  $8  $7,076 
Recovery from the allowance for loan
losses
  (49)  (156)  (18)  (9)  —   (5)  —   (237)
Provision (recovery) for loan losses (510) 288  35  13  (3) (6) 2  (181)
Recoveries  32   —   —   —   —   —   1   33  36  —  —  —  —  —  —  36 
Charge-offs  (25)  —   —   —   —   —   (1)  (26)  (1)
  —   —   —   —   —   (1)
 (2)
Allowance for loan losses,
end of period
 $2,741  $3,336  $1,012  $38  $3  $19  $6  $7,155  $2,234  $3,507  $1,085  $74  $—  $20  $9  $6,929 
                                                        
Allowance for loan losses:                                                        
Individually evaluated for impairment $124  $—  $—  $—  $—  $5  $—  $129  $47  $—  $—  $—  $—  $7  $—  $54 
Collectively evaluated for impairment  2,617   3,336   1,012   38   3   14   6   7,026   2,187   3,507   1,085   74   —   13   9  6,875 
Allowance for loan losses,
end of period
 $2,741  $3,336  $1,012  $38  $3  $19  $6  $7,155  $2,234  $3,507  $1,085  $74  $—  $20  $9  $6,929 
                                                        
Loans held for investment:                                                        
Individually evaluated for impairment $6,370  $—  $—  $2,050  $—  $68  $—  $8,488  $3,766  $—  $—  $1,139  $—  $45  $—  $4,950 
Collectively evaluated for impairment  301,110   454,821   112,026   6,906   167   348   104   875,482   324,566   479,597   110,652   4,773   —   323   144  920,055 
Total loans held for investment,
gross
 $307,480  $454,821  $112,026  $8,956  $167  $416  $104  $883,970  $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
  0.89%  0.73%  0.90%  0.42%  1.80%  4.57%  5.77%  0.81% 0.68% 0.73% 0.98% 1.25% —% 5.43% 6.25% 0.74%

15
18
  Quarter Ended September 30, 2018
 
(In Thousands) 
Single-
family
  
Multi-
family
  Commercial Real Estate  Construction  Other  Commercial Business  Consumer  Total 
Allowance for loan losses:                        
Allowance at beginning of  period $2,783  $3,492  $1,030  $47  $3  $24  $6  $7,385 
Provision (recovery) for loan losses  (49)  (156)  (18)  (9)  —   (5)  —   (237)
Recoveries  32   —   —   —   —   —   1   33 
Charge-offs  (25)
  —   —   —   —   —   (1)  (26
)
Allowance for loan losses,
  end of period
 $2,741  $3,336  $1,012  $38  $3  $19  $6  $7,155 
                                 
Allowance for loan losses:                                
Individually evaluated for impairment $124  $—  $—  $—  $—  $5  $—  $129 
Collectively evaluated for impairment  2,617   3,336   1,012   38   3   14   6   7,026 
Allowance for loan losses,
  end of period
 $2,741  $3,336  $1,012  $38  $3  $19  $6  $7,155 
                                 
Loans held for investment:                                
Individually evaluated for impairment $6,370  $—  $—  $745  $—  $68  $—  $7,183 
Collectively evaluated for impairment  301,110   454,821   112,026   3,101   167   348   104   871,677 
Total loans held for investment,
  gross
 $307,480  $454,821  $112,026  $3,846  $167  $416  $104  $878,860 
Allowance for loan losses as
  a percentage of gross loans
  held for investment
  0.89%  0.73%  0.90%  0.99%  1.80%  4.57%  5.77%  0.81%
  Quarter Ended September 30, 2017 
(In Thousands) 
Single-
family
  
Multi-
family
  
Commercial
Real Estate
  Construction  
Commercial
Business
  Consumer  Total 
Allowance for loan losses:                     
Allowance at beginning of  period $3,601  $3,420  $879  $96  $36  $7  $8,039 
Provision (recovery) for loan losses  123   11   (4)  44   (5)  —   169 
Recoveries  84   —   —   —   —   —   84 
Charge-offs  (229)  —   —   —   —   —   (229)
     Allowance for loan losses,
       end of period
 $3,579  $3,431  $875  $140  $31  $7  $8,063 
                             
Allowance for loan losses:                            
Individually evaluated for impairment $17  $—  $—  $—  $15  $—  $32 
Collectively evaluated for impairment  3,562   3,431   875   140   16   7   8,031 
     Allowance for loan losses,
       end of period
 $3,579  $3,431  $875  $140  $31  $7  $8,063 
                             
Loans held for investment:                            
Individually evaluated for impairment $6,239  $—  $—  $—  $79  $—  $6,318 
Collectively evaluated for impairment  316,124   482,617   96,863   16,290   387   131   912,412 
     Total loans held for investment,
       gross
 $322,363  $482,617  $96,863  $16,290  $466  $131  $918,730 
Allowance for loan losses as
  a percentage of gross loans
  held for investment
  1.11%  0.71%  0.90%  0.86%  6.65%  5.34%  0.88%




16
19

The following tables identify the Corporation'sCorporation’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'sborrower’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, 2018 
  Unpaid           Net 
  Principal  Related  Recorded     Recorded 
(In Thousands) Balance  Charge-offs  Investment  
Allowance(1)
  Investment 
                
Mortgage loans:               
Single-family:               
With a related allowance $2,313  $—  $2,313  $(408) $1,905 
Without a related allowance(2)
  4,832   (684)  4,148   —   4,148 
    Total single-family  7,145   (684)  6,461   (408)  6,053 
                     
Construction:                    
Without a related allowance(3)
  745   —   745   —   745 
    Total construction  745   —   745   —   745 
                     
Commercial business loans:                    
With a related allowance  68   —   68   (4)  64 
Total commercial business loans  68   —   68   (4)  64 
                     
Total non-performing loans $7,958  $(684) $7,274  $(412) $6,862 


    At September 30, 2019 
    Unpaid           Net 
    Principal  Related  Recorded     Recorded 
(In Thousands) Balance  Charge-offs  Investment  
Allowance (1)
  Investment 
                
Mortgage loans:               
Single-family:               
With a related allowance $1,112  $—  $1,112  $(133) $979 
Without a related allowance (2)
  3,576   (502)  3,074   —   3,074 
Total single-family  4,688   (502)  4,186   (133)  4,053 
                     
Construction:                    
Without a related allowance (2)
  1,139   —   1,139   —   1,139 
Total construction  1,139   —   1,139   —   1,139 
                     
Commercial business loans:                    
With a related allowance  45   —   45   (7)  38 
Total commercial business loans  45   —   45   (7)  38 
                     
Total non-performing loans $5,872  $(502) $5,370  $(140) $5,230 
(1)  Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan, and fair value credit adjustments.
(2)  There was no related allowance for loan losses because the loans have been charged-off to their fair value or the fair value of the collateral is higher than the loan balance.
(3)  There was no related allowance for loan losses because the loans, net of undisbursed loan funds, have been charged-off to their fair value or the fair value of the collateral is higher than the net loan balance.
17

20
  At June 30, 2018 
  Unpaid           Net 
  Principal  Related  Recorded     Recorded 
(In Thousands) Balance  Charge-offs  Investment  
Allowance(1)
  Investment 
                
Mortgage loans:               
Single-family:               
With a related allowance $1,333  $—  $1,333  $(185) $1,148 
Without a related allowance(2)
  5,569   (724)  4,845   —   4,845 
Total single-family  6,902   (724)  6,178   (185)  5,993 
                     
Commercial business loans:                    
With a related allowance  70   —   70   (6)  64 
Total commercial business loans  70   —   70   (6)  64 
                     
Total non-performing loans $6,972  $(724) $6,248  $(191) $6,057 

    At June 30, 2019 
    Unpaid           Net 
    Principal  Related  Recorded     Recorded 
(In Thousands) Balance  Charge-offs  Investment  
Allowance (1)
  Investment 
                
Mortgage loans:               
Single-family:               
With a related allowance $2,640  $—  $2,640  $(434) $2,206 
Without a related allowance (2)
  3,518   (518)  3,000   —   3,000 
Total single-family  6,158   (518)  5,640   (434)  5,206 
                     
Construction:                    
Without a related allowance (2)
  971   —   971   —   971 
Total construction  971   —   971   —   971 
                     
Commercial business loans:                    
With a related allowance  49   —   49   (8)
  41 
Total commercial business loans  49   —   49   (8)
  41 
                     
Total non-performing loans $7,178  $(518) $6,660  $(442) $6,218 
(1)  Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan, and fair value credit adjustments.
(2)  There was no related allowance for loan losses because the loans have been charged-off to their fair value or the fair value of the collateral is higher than the loan balance.

At both September 30, 20182019 and June 30, 2018,2019, there were no commitments to lend additional funds to those borrowers whose loans were classified as non-performing, except for one construction loan with undisbursed loan funds at September 30, 2018..of $862,000 and $1.0 million, respectively.

For the quarters ended September 30, 2019 and 2018, and 2017, the Corporation'sCorporation’s average recorded investment in non-performing loans was $7.0$5.4 million and $7.9$7.0 million, respectively.  The Corporation records payments on non-performing loans utilizing the cash basis or cost recovery method of accounting during the periods when the loans are on non-performing status. For both quartersthe 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.  In comparison for the quarter ended September 30, 2018, and 2017,the Bank received $121,000 in interest payments from non-performing loans, of which $65,000 were recognized as interest income of $65,000 and $160,000, respectively, was recognized, based on cash receipts from loan payments on non-performing loans andthe remaining $56,000 and $94,000, respectively, was collected andwere applied to reduce the loan balances under the cost recovery method.


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The following table presents the average recorded investment in non-performing loans and the related interest income recognized for the quarters ended September 30, 20182019 and 2017:2018:
 Quarter Ended September 30,  Quarter Ended September 30, 
 2018  2017  2019  2018 
 Average  Interest  Average  Interest  Average  Interest  Average  Interest 
 Recorded  Income  Recorded  Income  Recorded  Income  Recorded  Income 
(In Thousands) Investment  Recognized  Investment  Recognized  Investment  Recognized  Investment  Recognized 
                        
Without related allowances:                        
Mortgage loans:                        
Single-family $4,599  $40  $6,167  $135  $3,086  $116  $4,599  $40 
Commercial real estate  —   —   67   13 
Construction  248   —   —   —   1,084   —   248   — 
  4,847   40   6,234   148  4,170  116  4,847  40 
                            
With related allowances:                            
Mortgage loans:                            
Single-family  2,071   24   1,609   11  1,198  12  2,071  24 
Commercial business loans  68   1   79   1   46   1   68   1 
  2,139   25   1,688   12  1,244  13  2,139  25 
                                
Total $6,986  $65  $7,922  $160  $5,414  $129  $6,986  $65 

For the quartersquarter 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.  For the quarter ended September 30, 2018, and 2017, thereno new loans were no loans that were newly modifiedrestructured from their original terms re-underwritten or identified in the Corporation's asset quality reportsand classified as restructured loans.loans, while one restructured loan was upgraded to the pass category. During the quarters ended September 30, 20182019 and 2017,2018, no restructured loans were in default within a 12-month period subsequent to their original restructuring.  Additionally, during the quarters ended September 30, 2019 and 2018, and 2017, there werewas no loansloan whose modification was extended beyond the initial maturity of the modification. At both September 30, 20182019 and June 30, 2018,2019, there were no commitments to lend additional funds to those borrowers whose loans were restructured.

As of September 30, 2018,2019, the Corporation held 10six restructured loans with a net outstanding balance of $4.8$1.8 million:  one loan was classified as substandard and remainsspecial mention on accrual status ($1.4 million);431,000) and ninefive loans were classified as substandard on non-accrual status ($3.41.4 million). As of June 30, 2018,2019, the Corporation held 11eight restructured loans with a net outstanding balance of $5.2$3.8 million: one loan was classified as special mention and remains on accrual status ($389,000)437,000); one loan was classified as substandard and remains on accrual status ($1.4 million); and ninesix loans were classified as substandard on non-accrual status ($3.41.9 million).  Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.  Assets that do not currently expose the Corporation to sufficient risk to warrant adverse classification but possess weaknesses are designated as special mention and are closely monitored by the Corporation.  As of September 30, 20182019 and June 30, 2018, $3.12019, $1.4 million or 66%77%, and $2.9$2.4 million or 56%63%, respectively, of the restructured loans were current with respect to their modified payment terms.

The Corporation upgrades restructured single-family loans to the pass category if the borrower has demonstrated satisfactory contractual payments for at least six consecutive months; 12 months for those loans that were restructured more than once; and if the borrower has demonstrated satisfactory contractual payments beyond 12 consecutive months, the loan is no longer categorized as a restructured loan.  In addition to the payment history described above, multi-family, commercial real estate, construction and commercial business loans must also demonstrate a combination of the following characteristics to be upgraded: satisfactory cash flow, satisfactory guarantor support, and additional collateral support, among others.

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

The following table summarizes at the dates indicated the restructured loan balances, net of allowance for loan losses, by loan type and non-accrual versus accrual status:
 At  At  At  At 
(In Thousands) September 30, 2018  June 30, 2018  September 30, 2019  June 30, 2019 
Restructured loans on non-accrual status:            
Mortgage loans:            
Single-family $3,280  $3,328  $1,316  $1,891 
Commercial business loans  64   64   38   41 
Total  3,344   3,392  1,354  1,932 
              
Restructured loans on accrual status:              
Mortgage loans:              
Single-family  1,425   1,788  431  1,861 
Total  1,425   1,788  431  1,861 
                
Total restructured loans $4,769  $5,180  $1,785  $3,793 

The following tables identify the Corporation'sCorporation’s total recorded investment in restructured loans by type at the dates and for the periods indicated.
  At September 30, 2018 
  Unpaid           Net 
  Principal  Related  Recorded     Recorded 
(In Thousands) Balance  Charge-offs  Investment  
Allowance(1)
  Investment 
                
Mortgage loans:               
Single-family:               
With a related allowance $2,221  $—  $2,221  $(125) $2,096 
Without a related allowance(2)
  3,015   (406)  2,609   —   2,609 
Total single-family  5,236   (406)  4,830   (125)  4,705 
                     
Commercial business loans:                    
With a related allowance  68   —   68   (4)  64 
Total commercial business loans  68   —   68   (4)  64 
                     
Total restructured loans $5,304  $(406) $4,898  $(129) $4,769 

    At September 30, 2019 
    Unpaid           Net 
    Principal  Related  Recorded     Recorded 
(In Thousands) Balance  Charge-offs  Investment  
Allowance (1)
  Investment 
                
Mortgage loans:               
Single-family:               
With a related allowance $693  $—  $693  $(47) $646 
Without a related allowance (2)
  1,466   (365)  1,101   —   1,101 
Total single-family  2,159   (365)  1,794   (47)  1,747 
                     
Commercial business loans:                    
With a related allowance  45   —   45   (7)  38 
Total commercial business loans  45   —   45   (7)  38 
                     
Total restructured loans $2,204  $(365) $1,839  $(54) $1,785 
(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.

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

    At June 30, 2019 
    Unpaid           Net 
    Principal  Related  Recorded     Recorded 
(In Thousands) Balance  Charge-offs  Investment  
Allowance(1)
  Investment 
                
Mortgage loans:               
Single-family:               
With a related allowance $2,199  $—  $2,199  $(122) $2,077 
Without a related allowance(2)
  2,040   (365)  1,675   —   1,675 
Total single-family  4,239   (365)  3,874   (122)  3,752 
                     
Commercial business loans:                    
With a related allowance  49   —   49   (8)  41 
Total commercial business loans  49   —   49   (8)  41 
                     
Total restructured loans $4,288  $(365) $3,923  $(130) $3,793 
(1)  Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan.
(2)  There was no related allowance for loan losses because the loans have been charged-off to their fair value or the fair value of the collateral is higher than the loan balance.

During the quarter ended September 30, 2019, no properties were acquired in the settlement of loans and no previously foreclosed upon properties were sold.  This compares to the quarter ended September 30, 2018 when no properties were acquired in the settlement of loans, while one previously foreclosed upon property was sold. This compares to the quarter ended September 30, 2017 when no properties were acquired in the settlement of loans, while two previously foreclosed upon properties were sold. As of September 30, 2018,2019 and June 30, 2019, there was one outstandingno real estate owned property located in California with a net fair value of $524,000. This compares to two real estate owned properties located in California with total net fair value of $906,000 at June 30, 2018.both dates.  A new appraisal wasis obtained on each of the properties at the time of foreclosure and fair value wasis derived by using the lower of the appraised value or the listing price of the property, net of selling costs.  Any initial loss wasis 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 statementcondensed consolidated statements of operations.  In addition, the Corporation records costs to carry real estate owned as real estate operating expenses as incurred.

Note 7:6: 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'sCorporation’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, 20182019 and June 30, 2018,2019, the Corporation had commitments to extend credit (onon loans to be held for investment and loans to be held for sale) of $49.2$7.1 million and $66.3$4.3 million, respectively.


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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, 2018  June 30, 2018  September 30, 2019  June 30, 2019 
(In Thousands)            
            
Undisbursed loan funds – Construction loans $5,110  $4,302  $6,213  $6,592 
Undisbursed lines of credit – Commercial business loans  1,548   495  1,065  1,003 
Undisbursed lines of credit – Consumer loans  497   503  470  479 
Commitments to extend credit on loans to be held for investment  6,793   9,352  7,109  4,254 
Total $13,948  $14,652  $14,857  $12,328 

The following table provides information regarding the allowance for loan losses for the undisbursed funds and commitments to extend credit on loans to be held for investment for the quarters ended September 30, 20182019 and 2017.2018.
  
For the Quarters
Ended
September 30,
 
(In Thousands) 2018  2017 
Balance, beginning of the period $157  $277 
Recovery  (8)  (64)
Balance, end of the period $149  $213 

 For the Quarters Ended
September 30,		 
(In Thousands)2019 2018 
Balance, beginning of the period $141  $157 
Provision (recovery)  2   (8)
Balance, end of the period $143  $149 
In accordance with ASC 815, "Derivatives“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"(“TBA”) MBS trades, put option contracts and call option contracts are recorded at fair value on the Condensed Consolidated Statements of Financial Condition. At September 30, 2018, $765,000 was included in other assets and $30,000 was included in other liabilities; at June 30, 2018, $849,000 was included in other assets and $464,000 was included in other liabilities.  The Corporation does not apply hedge accounting to its derivative financial instruments; therefore, all changes in fair value are recorded in earnings. As of September 30, 2019 and June 30, 2019, there were no outstanding derivative financial instruments.

The net impact of derivative financial instruments is recorded within the gain on sale of loans contained in the Condensed Consolidated Statements of Operations during the quarters ended September 30, 20182019 and 20172018 was as follows:
 
For the Quarters
Ended
September 30,
  For the Quarters Ended
September 30,		 
Derivative Financial Instruments 2018  2017  2019  2018 
(In Thousands)            
Commitments to extend credit on loans to be held for sale $(329) $(122) $—  $(329)
Mandatory loan sale commitments and TBA MBS trades
  679   (209)  —   679 
Option contracts, net  —   (37)
Total net gain (loss) $350  $(368)
Total net gain $—  $350 

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 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, 2019 and June 30, 2019, the Bank serviced $8.8 million and $9.7 million of loans under this program, respectively and has established a recourse liability of $50,000 at both dates.
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The outstanding derivative financial instrumentsOccasionally, 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, 2019, the Bank repurchased one single-family loan of $566,000. In comparison, the Bank repurchased three single-family loans totaling $253,000 (including two loans that were fully charged off) during the quarter ended September 30, 2018. There were no other repurchase requests, which did not result in the repurchase of the loan itself, were settled in the quarters ended September 30, 2019 and 2018. In addition to the specific recourse liability for the MPF program, the Bank established a recourse liability of $200,000 for loans sold to other loan sale agreements at the dates indicated wereinvestors as follows:
  September 30, 2018  June 30, 2018 
Derivative Financial Instruments Amount  
Fair
Value
  Amount  
Fair
Value
 
(In Thousands)            
Commitments to extend credit on loans to be held for sale (1)
 $42,403  $496  $56,906  $825 
Best efforts loan sale commitments  (24,843)  —   (29,502)  — 
Mandatory loan sale commitments and TBA MBS trades  (93,793)  239   (117,759)  (440)
Total $(76,233) $735  $(90,355) $385 

(1)
Net of 22.6% at September 30, 2018 and 24.7% at June 30, 2018 of commitments which management has estimated may not fund.
of both September 30, 2019 and June 30, 2019.

The following table shows the summary of the recourse liability for the quarters ended September 30, 2019 and 2018:
  
For the Quarters Ended
September 30,
 
Recourse Liability 2019  2018 
(In Thousands)      
       
Balance, beginning of the period $250  $283 
Recovery from recourse liability  —   (33)
Net settlements in lieu of loan repurchases  —   — 
Balance, end of the period $250  $250 

Note 8:7: Fair Value of Financial Instruments

The Corporation adopted ASC 820, "Fair“Fair Value Measurements and Disclosures,"” and elected the fair value option pursuant to ASC 825, "Financial Instruments"“Financial Instruments” on loans originated for sale by PBM.sale.  ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  ASC 825 permits entities to elect to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the "Fair“Fair Value Option"Option”) at specified election dates.  At each subsequent reporting date, an entity is required to report unrealized gains and losses on items in earnings for which the fair value option has been elected.  The objective of the Fair Value Option is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.

The following table describes the difference at the dates indicated between the aggregate fair value and the aggregate unpaid principal balance of loans held for investment at fair value and loans held for sale at fair value:
(In Thousands) 
Aggregate
Fair Value
  
Aggregate
Unpaid
Principal
Balance
  
Net
Unrealized
(Loss) Gain
 
As of September 30, 2018:         
Loans held for investment, at fair value $4,945  $5,306  $(361)
Loans held for sale, at fair value $78,794  $77,126  $1,668 
             
As of June 30, 2018:            
Loans held for investment, at fair value $5,234  $5,546  $(312)
Loans held for sale, at fair value $96,298  $93,791  $2,507 
(In Thousands) 
Aggregate
Fair Value
  
Aggregate
Unpaid
Principal
Balance
  
Net
Unrealized
Gain (Loss)
 
As of September 30, 2019:         
Loans held for investment, at fair value $4,386  $4,529  $(143)
             
As of June 30, 2019:            
Loans held for investment, at fair value $5,094  $5,218  $(124)

ASC 820-10-65-4, "Determining“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

23
value in accordance with ASC 820, "Fair“Fair Value Measurements,"” when the volume and level of activity for the asset or liability have significantly decreased.

26
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'sCorporation’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'sCorporation’s financial assets and liabilities measured at fair value on a recurring basis consist of investment securities available for sale, loans held for investment at fair value, loans held for sale at fair value, interest-only strips and derivative financial instruments; while non-performing loans, mortgage servicing assets ("MSA") and real estate owned are measured at fair value on a nonrecurring basis.

Investment securities - available for sale are primarily comprised of U.S. government agency MBS, U.S. government sponsored enterprise MBS and privately issued CMO.  The Corporation utilizes quoted prices in active markets for similar securities for its fair value measurement of MBS and debt securities (Level 2) and broker price indications for similar securities in non-active markets for its fair value measurement of the CMO (Level 3).

Derivative financial instruments are comprised of commitments to extend credit on loans to be held for sale, mandatory loan sale commitments, TBA MBS trades and option contracts.  The fair value of TBA MBS trades is determined using quoted secondary-market prices (Level 2).  The fair values of other derivative financial instruments are determined by quoted prices for a similar commitment or commitments, adjusted for the specific attributes of each commitment (Level 3).

Loans held for investment at fair value are primarily single-family loans which have been transferred from loans held for sale.  The fair value is determined by the management estimates of the specific credit risk attributes of each loan, in addition to the quoted secondary-market prices which account for the interest rate characteristics of each loan (Level 3).

Loans held for sale at fair value are primarily single-family loans.  The fair value is determined, when possible, using quoted secondary-market prices such as mandatory loan sale commitments.  If no such quoted price exists, the fair value of a loan is determined by quoted prices for a similar loan or loans, adjusted for the specific attributes of each loan (Level 2).

Non-performing loans are loans which are inadequately protected by the current net worth and paying capacity of the borrowers or of the collateral pledged.  The non-performing loans are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.  The fair value of a non-performing loan is determined based on an observable market price or current appraised value of the underlying collateral.  Appraised and reported values may be discounted based on management'smanagement’s historical knowledge, changes in market conditions from the time of valuation, and/or management'smanagement’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
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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

24
appraised value of its collateral (Level 2).  Non-performing loans are reviewed and evaluated on at least a quarterly basis for additional allowance and adjusted accordingly, based on the same factors identified above.  This loss is not recorded directly as an adjustment to current earnings or other comprehensive income (loss), but rather as a component in determining the overall adequacy of the allowance for loan losses.  These adjustments to the estimated fair value of non-performing loans may result in increases or decreases to the provision for loan losses recorded in current earnings.

The Corporation uses the amortization method for its MSA, which amortizes the MSA in proportion to and over the period of estimated net servicing income and assesses the MSA for impairment based on fair value at each reporting date.  The fair value of the MSA is derived using the present value method; which includes a third party'sparty’s prepayment projections of similar instruments, weighted-average coupon rates, estimated servicing costs and discount interest rates (Level 3).

The rights to future income from serviced loans that exceed contractually specified servicing fees are recorded as interest-only strips.  The fair value of interest-only strips is derived using the same assumptions that are used to value the related MSA (Level 3).

The fair value of real estate owned is derived from the lower of the appraised value or the listing price, net of estimated selling costs (Level 2).

The Corporation'sCorporation’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'sCorporation’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.
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The following fair value hierarchy tables present information at the dates indicated about the Corporation'sCorporation’s assets measured at fair value on a recurring basis:
 Fair Value Measurement at September 30, 2018 Using:  Fair Value Measurement at September 30, 2019 Using: 
(In Thousands) Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  Total 
Assets:                        
Investment securities - available for sale:                        
U.S. government agency MBS $—  $4,156  $—  $4,156  $—  $3,413  $—  $3,413 
U.S. government sponsored enterprise MBS  —   2,561   —   2,561  —  1,851  —  1,851 
Private issue CMO  —   —   316   316   —   —   253   253 
Investment securities - available for sale  —   6,717   316   7,033  —  5,264  253  5,517 
                            
Loans held for investment, at fair value  —   —   4,945   4,945  —  —  4,386  4,386 
Loans held for sale, at fair value  —   78,794   —   78,794 
Interest-only strips  —   —   24   24  —  —  14  14 
                
Derivative assets:                
Commitments to extend credit on loans to be held for sale  —   —   516   516 
Mandatory loan sale commitments  —   —   1   1 
TBA MBS trades  —   248   —   248 
Derivative assets  —   248   517   765 
Total assets $—  $85,759  $5,802  $91,561  $—  $5,264  $4,653  $9,917 
                            
Liabilities:                
Derivative liabilities:                
Commitments to extend credit on loans to be held for sale $—  $—  $20  $20 
Mandatory loan sale commitments  —   —   10   10 
Derivative liabilities  —   —   30   30 
Liabilities $—  $—  $—  $— 
Total liabilities $—  $—  $30  $30  $—  $—  $—  $— 

25
29
  Fair Value Measurement at June 30, 2018 Using: 
(In Thousands) Level 1  Level 2  Level 3  Total 
Assets:            
   Investment securities - available for sale:            
      U.S. government agency MBS $—  $4,384  $—  $4,384 
      U.S. government sponsored enterprise MBS  —   2,762   —   2,762 
      Private issue CMO  —   —   350   350 
          Investment securities - available for sale  —   7,146   350   7,496 
                 
   Loans held for investment, at fair value  —   —   5,234   5,234 
   Loans held for sale, at fair value  —   96,298   —   96,298 
   Interest-only strips  —   —   23   23 
                 
   Derivative assets:                
      Commitments to extend credit on loans to be held for sale  —   —   849   849 
         Derivative assets  —   —   849   849 
Total assets $—  $103,444  $6,456  $109,900 
                 
Liabilities:                
   Derivative liabilities:                
      Commitments to extend credit on loans to be held for sale $—  $—  $24  $24 
      Mandatory loan sale commitments  —   —   32   32 
      TBA MBS trades  —   408   —   408 
          Derivative liabilities  —   408   56   464 
Total liabilities $—  $408  $56  $464 



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

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, 2018  For the Quarter Ended September 30, 2019 
 
Fair Value Measurement
Using Significant Other Unobservable Inputs
(Level 3)
  
Fair Value Measurement
Using Significant Other Unobservable Inputs
(Level 3)
 
(In Thousands) 
Private
Issue
CMO
  
Loans Held
For
Investment, at
fair value (1)
  
Interest-
Only Strips
  
Loan
Commitments
to Originate (2)
  
Mandatory
Commitments (3)
 Total  
Private Issue
CMO
 
Loans Held For Investment,
at fair value (1)
 
Interest-
Only Strips
  Total 
Beginning balance at June 30, 2018 $350  $5,234  $23  $825  $(32) $6,400 
Beginning balance at June 30, 2019 $269  $5,094  $16  $
5,379 
Total gains or losses (realized/unrealized):                                   
Included in earnings  —   (49)  —   (329)  22   (356) —  (18) —  (18)
Included in other comprehensive loss  —   —   1   —   —   1  —  —  (2) (2)
Purchases  —   —   —   —   —   —  —  —  —  — 
Issuances  —   —   —   —   —   —  —  —  —  — 
Settlements  (34)  (710)  —   —   1   (743) (16) (690) —  (706)
Transfers in and/or out of Level 3  —   470   —   —   —   470  —   —  —  — 
Ending balance at September 30, 2018 $316  $4,945  $24  $496  $(9) $5,772 
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.


26
  For the Quarter Ended September 30, 2018 
  
Fair Value Measurement
Using Significant Other Unobservable Inputs
(Level 3)
 
(In Thousands) 
Private
Issue
CMO
  
Loans Held
For
Investment, at
fair value (1)
  
Interest-
Only
Strips
  
Loan
Commit-
ments to
Originate (2)
  
Manda-
tory
Commit-
ments (3)
  Total 
Beginning balance at June 30, 2018 $350  $5,234  $23  $825  $(32) $6,400 
   Total gains or losses (realized/unrealized):                        
      Included in earnings  —   (49)  —   (329)  22   (356)
      Included in other comprehensive loss  —   —   1   —   —   1 
   Purchases  —   —   —   —   —   — 
   Issuances  —   —   —   —   —   — 
   Settlements  (34)  (710)  —   —   1   (743)
   Transfers in and/or out of Level 3  —   470   —   —   —   470 
Ending balance at September 30, 2018 $316  $4,945  $24  $496  $(9) $5,772 
(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.
(2)
Consists of commitments to extend credit on loans to be held for sale.
(3)
Consists of mandatory loan sale commitments.

  For the Quarter Ended September 30, 2017 
  
Fair Value Measurement
Using Significant Other Unobservable Inputs
(Level 3)
 
(In Thousands) 
Private
Issue
CMO
  
Loans Held
For
Investment, at
fair value (1)
  
Interest-
Only
Strips
  
Loan
Commit-
ments to
Originate (2)
  
Manda-
tory
Commit-
ments (3)
  
Option
Contracts
  Total 
Beginning balance at June 30, 2017 $461  $6,445  $31  $809  $47  $37  $7,830 
   Total gains or losses (realized/unrealized):                            
      Included in earnings  —   8   —   (122)  (53)  (37)  (204)
      Included in other comprehensive income  1   —   (3)  —   —   —   (2)
   Purchases  —   —   —   —   —   —   — 
   Issuances  —   —   —   —   —   —   — 
   Settlements  (14)  (51)  —   —   2   —   (63)
   Transfers in and/or out of Level 3  —   522   —   —   —   —   522 
Ending balance at September 30, 2017 $448  $6,924  $28  $687  $(4) $—  $8,083 

(1)
The valuation of loans held for investment at fair value includes the management estimates of the specific credit risk attributes of each loan, in addition to the quoted secondary-market prices which account for the interest rate characteristics of each loan.
(2)
Consists of commitments to extend credit on loans to be held for sale.
(3)
Consists of mandatory loan sale commitments.
31
The following fair value hierarchy tables present information about the Corporation'sCorporation’s assets measured at fair value at the dates indicated on a nonrecurring basis:
 Fair Value Measurement at September 30, 2018 Using:  Fair Value Measurement at September 30, 2019 Using: 
(In Thousands) Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  Total 
Non-performing loans $—  $4,893  $1,969  $6,862  $—  $4,212  $1,018  $5,230 
Mortgage servicing assets  —   —   125   125  —  —  502  502 
Real estate owned, net  —   524   —   524   —   —   —   — 
Total $—  $5,417  $2,094  $7,511  $—  $4,212  $1,520  $5,732 
 Fair Value Measurement at June 30, 2018 Using:  Fair Value Measurement at June 30, 2019 Using: 
(In Thousands) Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  Total 
Non-performing loans $—  $4,845  $1,212  $6,057  $—  $3,971  $2,247  $6,218 
Mortgage servicing assets  —   —   135   135  —  —  627  627 
Real estate owned, net  —   906   —   906  —  —  —  — 
Total $—  $5,751  $1,347  $7,098  $—  $3,971  $2,874  $6,845 

27
32

The following table presents additional information about valuation techniques and inputs used for assets and liabilities, including derivative financial instruments, which are measured at fair value and categorized within Level 3 as of September 30, 2018:2019:
(Dollars In Thousands)Fair Value
As of
September 30,
2019		 
Valuation
Techniques
 Unobservable Inputs 
Range(1)
(Weighted Average)
 
Impact to
Valuation
from an
Increase in
Inputs(2)
          
Assets:         
Securities available-for sale:
  Private issue CMO
$253  
Market comparable
pricing
 Comparability adjustment 2.6% - 3.0% (2.9%) Increase
          
Loans held for investment, at
  fair value
$4,386  
Relative value
analysis
 
Broker quotes
Credit risk factor
 
97.6% - 104.1%
(101.4%) of par
1.2% - 100.0% (4.6%)
 Increase

Decrease
          
Non-performing loans(3)
$684  Discounted cash flow Default rates 5.0% Decrease
          
Non-performing loans(4)
$334 ��
Relative value
analysis
 Credit risk factor 20.0% - 30.0% (20.5%) Decrease
          
Mortgage servicing assets$502  Discounted cash flow 
Prepayment speed (CPR)
Discount rate
 15.3% - 60.0% (25.1%)
9.0% - 10.5% (9.1%)		 Decrease
Decrease
          
Interest-only strips$14  Discounted cash flow 
Prepayment speed (CPR)
Discount rate
 20.4% - 40.6% (39.3%)
9.0%		 Decrease
Decrease
          
Liabilities:         
None           
(Dollars In Thousands) 
Fair Value
As of
September 30,
2018
 
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
 $316 Market comparable pricingComparability adjustment 1.1% – 1.3% (1.1%) Increase
                
Loans held for investment,
   at fair value
 $4,945 
Relative value
  analysis
Broker quotes

Credit risk factors
 
95.4% – 103.5%
(98.4%) of par
1.2% - 100.0% (5.2%)
 
Increase

Decrease
                
Non-performing loans $735 Discounted cash flowDefault rates 5.0% Decrease
Non-performing loans $1,234 Relative value analysisLoss severity 20.0% - 30.0% (22.5%) Decrease
                
Mortgage servicing assets $125 Discounted cash flow
Prepayment speed (CPR)
Discount rate
 7.6% - 60.0% (27.0%)9.0% - 10.5%(9.4%)
Decrease
Decrease
                
Interest-only strips $24 Discounted cash flow
Prepayment speed (CPR)
Discount rate
 
12.2% - 25.8% (24.1%)
9.0%
 
Decrease
Decrease
                
Commitments to extend credit
   on loans to be held for sale
 $516 Relative value analysis
TBA-MBS broker quotes
Fall-out ratio (3)
 
97.3% – 104.6%
(101.4%) of par
19.2% - 23.5% (22.6%)
 
Increase
 
Decrease
                
Mandatory loan sale
   commitments
 $1 Relative value analysis
TBA MBS broker quotes
Roll-forward costs (4)
 
99.1% of par
0.029%
 
Decrease
Decrease
                
Liabilities:              
                
Commitments to extend credit
   on loans to be held for sale
 $20 Relative value analysis
TBA-MBS broker quotes
Fall-out ratio (3)
 
101.3% – 103.5%
(101.3%) of par
19.2% - 23.5% (22.6%)
 
Decrease
 
Decrease
                
Mandatory loan sale
   commitments
 $10 Relative value analysis
TBA MBS broker quotes
Roll-forward costs (4)
 
98.8% - 104.4%
(101.9%) of par
0.029%
 
Increase
 
Increase
                

(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)
The percentageConsist of commitments to extend credit on loans to be held for sale which management has estimated may not fund.restructured loans.
(4)
An estimated cost to roll forward the mandatory loan sale commitments which management has estimated may not be delivered to the corresponding investors in a timely manner.Consist of other non-performing loans, excluding restructured loans.
33

The significant unobservable inputs used in the fair value measurement of the Corporation'sCorporation’s assets and liabilities include the following: prepayment speeds, discount rates, MBS – TBA quotes, fallout ratios, broker quotes and roll-forward costs, among others.  Significant increases or decreases in any of these inputs in isolation could result in significantly lower or higher fair value measurement. The various unobservable inputs used to determine valuations may have similar or diverging impacts on valuation.


28
The carrying amount and fair value of the Corporation'sCorporation’s other financial instruments as of September 30, 20182019 and June 30, 20182019 was as follows:
 September 30, 2018  September 30, 2019 
(In Thousands) 
Carrying
Amount
  
Fair
Value
  

Level 1
  

Level 2
  

Level 3
  Carrying
Amount		  Fair
Value		  
Level 1		  
Level 2		  
Level 3		 
Financial assets:                              
Investment securities - held to maturity $79,611  $78,974   —  $78,974  $—  $85,088  $86,272  $—  $86,272  $— 
Loans held for investment, not recorded at fair value $872,146  $842,453   —   —  $842,453  $919,928  $906,318  $—  $—  $906,318 
FHLB – San Francisco stock $8,199  $8,199   —  $8,199   —  $8,199  $8,199  $—  $8,199  $— 
                                   
Financial liabilities:                                   
Deposits $902,112  $872,546   —   —  $872,546  $831,736  $804,196  $—  $—  $804,196 
Borrowings $111,149  $108,367   —   —  $108,367  $131,092  $133,308  $—  $—  $133,308 

 June 30, 2018  June 30, 2019 
(In Thousands) 
Carrying
Amount
  
Fair
Value
  

Level 1
  

Level 2
  

Level 3
  Carrying
Amount		  Fair
Value		  
Level 1		  
Level 2		  
Level 3		 
Financial assets:                              
Investment securities - held to maturity $87,813  $87,239   —  $87,239   —  $94,090  $95,359  $—  $95,359  $— 
Loans held for investment, not recorded at fair value $897,451  $873,112   —   —  $873,112  $874,831  $861,374  $—  $—  $861,374 
FHLB – San Francisco stock $8,199  $8,199   —  $8,199   —  $8,199  $8,199  $—  $8,199  $— 
                                   
Financial liabilities:                                   
Deposits $907,598  $877,641   —   —  $877,641  $841,271  $813,087  $—  $—  $813,087 
Borrowings $126,163  $123,778   —   —  $123,778  $101,107  $102,826  $—  $—  $102,826 

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

Loans held for investment, not recorded at fair value: For loans that reprice frequently at market rates, the carrying amount approximates the fair value.  For fixed-rate loans, the fair value is determined by either (i) discounting the estimated future cash flows of such loans over their estimated remaining contractual maturities using a current interest rate at which such loans would be made to borrowers, or (ii) quoted market prices.

FHLB – San Francisco stock: The carrying amount reported for FHLB – San Francisco stock approximates fair value. When redeemed, the Corporation will receive an amount equal to the par value of the stock.

34
Deposits: The fair value of time deposits is estimated using a discounted cash flow calculation. The discount rate is based upon rates currently offered for deposits of similar remaining maturities.  The fair value of transaction accounts (checking, money market and savings accounts) is estimated using a discounted cash flow calculation and management estimates of current market conditions.

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

29
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, 2018,2019, there were no significant changes to the Corporation'sCorporation’s valuation techniques that had, or are expected to have, a material impact on its consolidated financial position or results of operations.

Note 9: Incentive Plans

As of September 30, 2018, the Corporation had two active share-based compensation plans, which are described below.  These plans are the 2013 Equity Incentive Plan ("2013 Plan") and the 2010 Equity Incentive Plan ("2010 Plan").  Additionally, the Corporation had one inactive share-based compensation plan - the 2006 Equity Incentive Plan ("2006 Plan") where no new awards can be granted but outstanding grants remain eligible for exercise.

For the quarters ended September 30, 2018 and 2017, the compensation cost for these plans was $685,000 and $266,000, respectively.  The income tax benefit recognized in the Condensed Consolidated Statements of Operations per adoption of ASU 2016-09 for share-based compensation plans for the quarters ended September 30, 2018 and 2017 were $126,000 and $27,000, respectively.

Equity Incentive Plans.  The Corporation established and the shareholders approved the 2013 Plan, the 2010 Plan and the 2006 Plan (collectively, "the Plans") for directors, advisory directors, directors emeriti, officers and employees of the Corporation and its subsidiary.  The 2013 Plan authorizes 300,000 stock options and 300,000 shares of restricted stock.  The 2013 Plan also provides that no person may be granted more than 60,000 stock options or 45,000 shares of restricted stock in any one year.  The 2010 Plan authorizes 586,250 stock options and 288,750 shares of restricted stock.  The 2010 Plan also provides that no person may be granted more than 117,250 stock options or 43,312 shares of restricted stock in any one year.  The 2006 Plan authorized 365,000 stock options and 185,000 shares of restricted stock.  The 2006 Plan also provided that no person was granted more than 73,000 stock options or 27,750 shares of restricted stock in any one year.

Equity Incentive Plans - Stock Options.  Under the Plans, options may not be granted at a price less than the fair market value at the date of the grant.  Options typically vest over a five-year or shorter period as long as the director, advisory director, director emeritus, officer or employee remains in service to the Corporation.  The options are exercisable after vesting for up to the remaining term of the original grant.  The maximum term of the options granted is 10 years.

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option valuation model with the following assumptions.  The expected volatility is based on implied volatility from historical common stock closing prices
35
for the prior 84 months.  The expected dividend yield is based on the most recent quarterly dividend on an annualized basis.  The expected term is based on the historical experience of all fully vested stock option grants and is reviewed annually.  The risk-free interest rate is based on the U.S. Treasury note rate with a term similar to the underlying stock option on the particular grant date.
During the first quarter of fiscal 2019, no options were granted or forfeited, while 15,000 options were exercised.  This compares to the first quarter of fiscal 2018 when no options were granted, 21,500 options were exercised and 2,500 options were forfeited. As of September 30, 2018 and 2017, there were 147,500 stock options available for future grants under the Plans at both dates.

The following table summarizes the stock option activity in the Plans for the quarter ended September 30, 2018.

  For the Quarter Ended September 30, 2018 
Options Shares  
Weighted-
Average
Exercise
Price
  
Weighted-
Average
Remaining
Contractual
Term (Years)
  
Aggregate
Intrinsic
Value
($000)
 
Outstanding at June 30, 2018  529,000  $12.77       
Granted  —  $—       
Exercised  (15,000) $10.21       
Forfeited  —  $—       
Outstanding at September 30, 2018  514,000  $12.84   5.06  $2,838 
Vested and expected to vest at September 30, 2018  510,800  $12.80   5.04  $2,838 
Exercisable at September 30, 2018  498,000  $12.63   4.96  $2,838 

As of September 30, 2018 and 2017, there was $88,000 and $777,000 of unrecognized compensation expense, respectively, related to unvested share-based compensation arrangements under the Plans.  The expense is expected to be recognized over a weighted-average period of 2.0 years and 1.3 years, respectively.  The forfeiture rate during the first three months of fiscal 2019 and 2018 was 20 percent for both periods, and was calculated by using the historical forfeiture experience of stock option grants and is reviewed annually.

Equity Incentive Plans – Restricted Stock.  The Corporation used 300,000 shares, 288,750 shares and 185,000 shares of its treasury stock to fund the 2013 Plan, the 2010 Plan and the 2006 Plan, respectively.  Awarded shares typically vest over a five-year or shorter period as long as the director, advisory director, director emeriti, officer or employee remains in service to the Corporation.  Once vested, a recipient of restricted stock will have all rights of a shareholder, including the power to vote and the right to receive dividends.  The Corporation recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the award date.

There were no restricted stock awards and no forfeitures, while there were 85,000 shares of restricted stock vested in the first quarter of fiscal 2019. This compares to no restricted stock activity, other than the forfeiture of 2,000 shares of restricted stock in the first quarter of fiscal 2018. As of September 30, 2018 and 2017, there were 267,750 shares and 267,750 shares of restricted stock, respectively available for future awards under the Plans.
36

The following table summarizes the unvested restricted stock activity in the quarter ended September 30, 2018.

  
For the Quarter Ended
September 30, 2018
 
Unvested Shares Shares  
Weighted-Average
Award Date
Fair Value
 
Unvested at June 30, 2018  98,500  $14.35 
Granted  —  $— 
Vested  (85,000) $13.74 
Forfeited  —  $— 
Unvested at September 30, 2018  13,500  $18.20 
Expected to vest at September 30, 2018  10,800  $18.20 

As of September 30, 2018 and 2017, the unrecognized compensation expense was $192,000 and $1.0 million, respectively, related to unvested share-based compensation arrangements under the Plans, and reported as a reduction to stockholders' equity.  This expense is expected to be recognized over a weighted-average period of 1.8 years and 1.5 years, respectively.  Similar to stock options, a forfeiture rate of 20 percent has been applied for the restricted stock compensation expense calculations in the first three months of fiscal 2019 and 2018.

Note 10:8: Reclassification adjustmentAdjustment of Accumulated Other Comprehensive Income ("AOCI")

The following tables provide the changes in AOCI by component for the quarters ended September 30, 20182019 and 2017.2018.
  For the Quarter Ended September 30, 2018 
  Unrealized gains and losses on 
(In Thousands) Investment securities available for sale  
Interest-
only strips
  Total 
          
Beginning balance at June 30, 2018 $194  $16  $210 
             
Other comprehensive (loss) income before reclassifications  (22)  1   (21)
Amount reclassified from accumulated other comprehensive income  —   —   — 
Net other comprehensive (loss) income  (22)  1   (21)
             
Ending balance at September 30, 2018 $172  $17  $189 

37
  For the Quarter Ended September 30, 2017 
  Unrealized gains and losses on 
(In Thousands) 
Investment securities
available for sale
  
Interest-
only strips
  Total 
          
Beginning balance at June 30, 2017 $211  $18  $229 
             
Other comprehensive income (loss) before reclassifications  3   (2)  1 
Amount reclassified from accumulated other comprehensive income  —   —   — 
Net other comprehensive income (loss)  3   (2)  1 
             
Ending balance at September 30, 2017 $214  $16  $230 

  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 income (loss) before reclassifications  (12)  (1)  (13)
Amount reclassified from accumulated other comprehensive income  —   —   — 
Net other comprehensive income (loss)  (12)  (1)  (13)
             
Ending balance at September 30, 2019 $138  $10  $148 

Note 11: Offsetting Derivative and Other Financial Instruments

The Corporation's derivative transactions are generally governed by International Swaps and Derivatives Association Master Agreements and similar arrangements, which include provisions governing the setoff of assets and liabilities between the parties.  When the Corporation has more than one outstanding derivative transaction with a single counterparty, the setoff provisions contained within these agreements generally allow the non-defaulting party the right to reduce its liability to the defaulting party by amounts eligible for setoff, including the collateral received as well as eligible offsetting transactions with that counterparty, irrespective of the currency, place of payment, or booking office.  The Corporation's policy is to present its derivative assets and derivative liabilities on the Condensed Consolidated Statements of Financial Condition on a net basis.  The derivative assets and liabilities are comprised of mandatory loan sale commitments, TBA MBS trades and option contracts.

The following tables present the gross and net amounts of derivative assets and liabilities and other financial instruments as reported in the Corporation's Condensed Consolidated Statement of Financial Condition, and the gross amount not offset in the Corporation's Condensed Consolidated Statement of Financial Condition as of the dates indicated.

As of September 30, 2018:
   GrossNet     
   AmountAmount     
   Offset in theof Assets inGross Amount Not Offset in 
   Condensedthe Condensedthe Condensed Consolidated 
 GrossConsolidatedConsolidatedStatements of Financial Condition 
 Amount ofStatementsStatements  Cash 
 Recognizedof Financialof FinancialFinancialCollateralNet
(In Thousands)AssetsConditionConditionInstrumentsReceivedAmount
Assets           
   Derivatives $249 $— $249 $— $— $249
Total $249 $— $249 $— $— $249
38

   GrossNet     
   AmountAmount     
   Offset in theof Liabilities inGross Amount Not Offset in 
   Condensedthe Condensedthe Condensed Consolidated 
 GrossConsolidatedConsolidatedStatements of Financial Condition 
 Amount ofStatementsStatements  Cash 
 Recognizedof Financialof FinancialFinancialCollateralNet
(In Thousands)LiabilitiesConditionConditionInstrumentsReceivedAmount
Liabilities           
   Derivatives $10 $— $10 $— $— $10
Total $10 $— $10 $— $— $10

As of June 30, 2018:
GrossNet
AmountAmount
Offset in theof Assets inGross Amount Not Offset in
Condensedthe Condensedthe Condensed Consolidated
GrossConsolidatedConsolidatedStatements of Financial Condition
Amount ofStatementsStatements Cash
Recognizedof Financialof FinancialFinancialCollateralNet
(In Thousands)AssetsConditionConditionInstrumentsReceivedAmount
Assets
   Derivatives$—$—$—$—$—$—
Total$—$—$—$—$—$—

   GrossNet     
   AmountAmount     
   Offset in theof Liabilities inGross Amount Not Offset in 
   Condensedthe Condensedthe Condensed Consolidated 
 GrossConsolidatedConsolidatedStatements of Financial Condition 
 Amount ofStatementsStatements  Cash 
 Recognizedof Financialof FinancialFinancialCollateralNet
(In Thousands)LiabilitiesConditionConditionInstrumentsReceivedAmount
Liabilities           
   Derivatives $440 $— $440 $— $— $440
Total $440 $— $440 $— $— $440
  For the Quarter Ended September 30, 2018 
  Unrealized gains and losses on 
(In Thousands) 
Investment securities
available for sale
  
Interest-
only strips
  Total 
          
Beginning balance at June 30, 2018 $194  $16  $210 
             
Other comprehensive income (loss) before reclassifications  (22)  1   (21)
Amount reclassified from accumulated other comprehensive income  —   —   — 
Net other comprehensive income (loss)  (22)  1   (21)
             
Ending balance at September 30, 2018 $172  $17  $189 
    


30
39

Note 12:9: 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 Company expects to be entitled to receive. The largest portion of the Company's revenue is from interest income, which is not in the scope of ASC 606. All of the Company's revenue from contracts with customers in the scope of ASC 606 is recognized in non-interest income.

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

Disaggregation of Revenue:

The following table includes the Company's non-interest income disaggregated by type of services for the quarters ended September 30, 20182019 and 2017:2018:

 
For the Quarters
Ended
September 30,
  For the Quarters Ended
September 30,		 
Types of Services 2018  2017 
Type of Services 2019  2018 
(In Thousands)            
Asset management fees $82  $119  $80  $82 
Debit card and ATM fees  419   402  421  419 
Deposit related fees  519   567  465  519 
Loan related fees  12   (25) 6  12 
BOLI (1)
  46   67  47  46 
Loan servicing fees (1)
  324   363  133  324 
Net gain on sale of loans (1)
  3,132   4,847 
Net gain (loss) on sale of loans (1)
 (86) 3,132 
Other  15   12   4   15 
Total non-interest income $4,549  $6,352  $1,070  $4,549 

(1)
Not in scope of ASC 606.

For the quarters ended September 30, 20182019 and 2017,2018, substantially all of the Company's revenues within the scope of ASC 606 are for performance obligations satisfied at a specified date.

Revenues recognized in scope of ASC 606:

Asset management fees: Asset management fees are variable, since they are based on the underlying portfolio value, which is subject to market conditions and amounts invested by clients through the Trust Company.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.

31
40
Debit card and ATM fees: Debit and ATM interchange income represents fees earned when a debit card issued by the Bank is used. The Bank earns interchange fees from debit cardholder transactions through the Visa®a third party payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders' debit card. Certain expenses directly associated with the debit cards are recorded on a net basis with the interchange income.

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

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

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

Note 13: Income Taxes10: Leases

On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax CutsThe Corporation accounts for its leases in accordance with ASC 842, which was implemented on July 1, 2019, and Jobs Act (the "Tax Act"). The Tax Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Tax Act reduces the corporate federal tax income rate from a maximum of 35 percent to a flat 21 percent. The corporate tax rate reduction was effective January 1, 2018. Sincerequires the Corporation has a fiscal year endto 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 June 30th, the reduced corporate income tax ratebuildings, space or equipment for its fiscal year 2018 resultedoperations. 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 applicationCorporation’s condensed consolidated statements of a blended federal statutory income tax ratefinancial condition. At September 30, 2019, all of 28.06 percent, which is based on the applicable tax rates beforeCorporation’s leases were classified as operating leases and after the Tax Act and corresponding number of days in the fiscal year before and after enactment, and then a flat 21 percent tax rate thereafter.

Under generally accepted accounting principles, the Corporation uses the assetdid not have any operating leases with an initial term of 12 months or less (“short-term leases”). Liabilities to make future lease payments and liability methodright of accountinguse assets are recorded for income taxes. Under this method, deferred tax assetsoperating leases and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets anddo not include short-term leases. These liabilities and their respective tax bases. Deferred taxright-of-use assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. At June 30, 2017, the Corporation's deferred tax assets and liabilities were determined based on the then-current enacted federal taxtotal 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 of 35 percent. As a resultfor each of the reductionremaining contractual terms at the adoption date as well as for future leases if the discount rate is not stated in the corporate income tax rate under the Tax Act,lease. For leases that contain variable lease payments, the Corporation revalued its deferred tax assets and liabilitiesassumes future lease payment escalations based on a lease payment escalation rate specified in the lease or the specified index rate observed at December 31, 2017. Deferred tax assets and liabilities realized in fiscal year 2018 were re-measuredthe time of lease commencement. Liabilities to make future lease payments are accounted for using the aforementioned blended rate. Allinterest method, being reduced by periodic contractual lease payments net of periodic interest accretion. Right-of-use assets for operating leases are amortized over the term of the associated lease by amounts that represent the difference between periodic straight-line lease expense and periodic interest accretion in the related liability to make future lease payments.

For the quarter ended September 30, 2019, expense associated with the Corporation’s leases totaled $190,000 and was recorded in premises and occupancy expenses and equipment expenses in the condensed consolidated statements of operations.


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

    
(In Thousands)  September 30, 2019 
Condensed Consolidated Statements of Condition:   
   Premises and equipment - Operating lease right of use assets $3,171 
   Accounts payable, accrued interest and other liabilities - Operating lease liabilities $3,382 
     
Condensed Consolidated Statements of Operations:    
   Premises and occupancy expenses from operating leases(1)
 $179 
   Equipment expenses from operating leases $11 
     
Condensed Consolidated Statements of Cash Flows:    
   Operating cash flows from operating leases, net(2)
 $284 
(1) Variable lease costs are immaterial. 
(2) Revenue related to sublease activity is immaterial and netted against operating lease expenses.
  
 

The following table provides information related to remaining deferred tax assetsminimum contractual lease payments and liabilities were re-measured usingother information associated with the new statutory federal rateCorporation’s leases as of 21 percent. These re-measurements collectively resulted in a discrete tax expense of $1.8 million that was recognized in fiscal 2018.September 30, 2019:

  
Amount(1)
 
Year Ending June 30, (In Thousands) 
2020 $771 
2021  753 
2022  677 
2023  478 
2024  361 
Thereafter  530 
Total contract lease payments, net(2)
 $3,570 
     
Total liability to make lease payments $3,382 
Difference in undiscounted and discounted future lease payments $189 
Weighted average discount rate  2.06 %
Weighted average remaining lease term (years)  4.9 

(1)   Contractual base rents do not include property taxes and other operating expenses due under respective lease agreements.
(2)   Revenue related to sublease activity is immaterial and not presented herein.

The estimated combined federal and state statutory tax rates, before discrete items, for fiscal 2018 and 2019 arefollowing table summarizes the impact of the adoption of the new lease accounting guidance on the Corporation’s condensed consolidated statements of financial condition as follows:
Statutory Tax RatesQ1FY2018Q2-Q4FY2018FY2019
Federal Tax Rate35.00%28.06%21.00%
State Tax Rate10.84%10.84%10.84%
Combined Statutory Tax Rate(1)
42.05%35.86%29.56%
of July 1, 2019:

(1) The combined statutory tax rate is net of the federal tax benefit for the state tax deduction.
(In Thousands) 
June 30,
2019
  
Adjustments
due to new
lease guidance
  
July 1,
2019
  
September 30,
2019
 
Total assets $1,084,850  $3,399  $1,088,249  $1,105,296 
Total liabilities $964,209  $3,704  $967,913  $983,127 
Total equity $120,641  $—  $120,641  $122,169 

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41
The Corporation's effective tax rate may differ from the estimated statutory tax rates described above due to discrete items such as further adjustments to net deferred tax assets, excess tax benefits derived from stock option exercises and non-taxable earnings from bank owned life insurance, among other items.
Note 14:11: Subsequent Event

On October 25, 2018,30, 2019, the Corporation announced that the Corporation'sCorporation’s Board of Directors declared a quarterly cash dividend of $0.14 per share. Shareholders of the Corporation'sCorporation’s common stock at the close of business on November 15, 2018 will be20, 2019 entitled to receive the cash dividend. The cash dividend will be payable on December 6, 2018.11, 2019.


ITEM 2 – Management'sManagement’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'sBank’s conversion from a federal mutual to a federal stock savings bank ("Conversion"(“Conversion”).  The Conversion was completed on June 27, 1996.  The Corporation is regulated by the Federal Reserve Board ("FRB"(“FRB”).  At September 30, 2018,2019, the Corporation had total assets of $1.16$1.11 billion, total deposits of $902.1$831.7 million and total stockholders'stockholders’ equity of $121.7$122.2 million.  The Corporation has not engaged in any significant activity other than holding the stock of the Bank.  Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank and its subsidiaries.  As used in this report, the terms "we," "our," "us,"“we,” “our,” “us,” and "Corporation"“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"(“OCC”), its primary federal regulator, and the Federal Deposit Insurance Corporation ("FDIC"(“FDIC”), the insurer of its deposits.  The Bank'sBank’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'sCorporation operates in a single business consists of community banking activities and mortgage banking activities, conducted by Provident Bank and Provident Bank Mortgage ("PBM"), a division ofsegment through the Bank. CommunityThe Bank's activities include attracting deposits, offering banking activities primarily consist of accepting deposits from customers within the communities surrounding the Bank's full service officesservices and investing those funds inoriginating and purchasing single-family, loans, multi-family, loans, commercial real estate, loans, construction loans,and,  to a lesser extent, other mortgage, commercial business loans,and consumer loans and other real estate loans.  The Bank also offers business checking accounts, other businessDeposits are collected primarily from 13 banking services, and services loans for others.  Mortgage banking activities consist of the origination and sale of mortgage loans secured primarily by single-family residences.  The Bank currently operates 14 retail/business banking officeslocations located in Riverside County and San Bernardino County (commonly known as the Inland Empire).  Provident Bank Mortgage operates two wholesale loan production offices: onecounties in PleasantonCalifornia. Loans are primarily originated and onepurchased in Rancho Cucamonga, California;Southern and nine retail loan production offices located throughoutNorthern California.  The Corporation's revenues are derived principally from interest on its loans and investment securities and fees generated through its community banking and mortgage banking activities. There are various risks inherent in the Corporation'sCorporation’s business including, among others, the general business environment, interest rates, the California real estate market, the demand for loans, the prepayment of loans, the repurchase of loans previously sold to investors, the secondary market conditions to sell loans, competitive conditions, legislative and regulatory changes, fraud and other risks.

The Corporation began to distribute quarterly cash dividends in the quarter ended December 31,September 30, 2002.  On July 31, 2018,30, 2019, the Corporation declared a quarterly cash dividend of $0.14 per share for the Corporation'sCorporation’s shareholders of record at the close of business on August 21, 2018,20, 2019, which was paid on September 11, 2018.10, 2019.  Future declarations or payments of dividends will be
42
subject to the consideration of the Corporation'sCorporation’s Board of Directors, which will take into account the Corporation'sCorporation’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.  For further discussion, see Note 12

On October 30, 2019, the Corporation announced that the Corporation’s Board of Directors declared a quarterly cash dividend of $0.14 per share. Shareholders of the NotesCorporation’s common stock at the close of business on November 20, 2019 will be entitled to Unaudited Interim Condensed Consolidated Financial Statements.receive the cash dividend.  The cash dividend will be payable on December 11, 2019.

Management's34
Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding the financial condition and results of operations of the Corporation.  The information contained in this section should be read in conjunction with the Unaudited Interim Condensed Consolidated Financial Statements and accompanying selected Notes to Unaudited Interim Condensed Consolidated Financial Statements.


Safe-Harbor Statement

Certain matters in this Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  This Form 10-Q contains statements that the Corporation believes are "forward-looking“forward-looking statements."”  These statements relate to the Corporation'sCorporation’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 credit risks of lending activities, including changes in the level and trend of loan delinquencies and charge-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the residential and commercial real estate markets and may lead to increased losses and non-performing assets and may result in our allowance for loan losses not being adequate to cover actual losses and require us to materially increase our reserve; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of examinations of the Corporation by the FRB or of the Bank by the OCC or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to enter into a formal enforcement action or to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements and restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules, including as a result of Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; our ability to implement our branch expansion strategy; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired or may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; our ability to manage loan delinquency rates; our ability to retain key members of our senior management team; costs and effects of litigation,
43
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,

35
regulatory, and technological factors affecting our operations, pricing, products and services and other risks detailed in this report and in the Corporation'sCorporation’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'smanagement’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'sCorporation’s financial condition and results of operations is based upon the Corporation'sCorporation’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 2018Corporation’s 2019 Annual Report on Form 10-K for the year ended June 30, 20182019 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, 20182019 to the critical accounting policies as described in the Corporation's 2018Corporation’s 2019 Annual Report on Form 10-K for the period ended June 30, 2018.2019.


Executive Summary and Operating Strategy

Provident Savings Bank, F.S.B., established in 1956, is a financial services company committed to serving consumers and small to mid-sized businesses in the Inland Empire region of Southern California. The Bank conducts its business operations as Provident Bank Provident Bank Mortgage, a division of the Bank, and through its subsidiary, Provident Financial Corp.  The business activities of the Corporation, primarily through the Bank and its subsidiary, consist of community banking, mortgage banking and, to a lesser degree, investment services for customers and trustee services on behalf of the Bank.

Community banking operations primarily consist of accepting deposits from customers within the communities surrounding the Corporation'sCorporation’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.

44
During the next three years, subject to market conditions, the Corporation intends to improve its community banking business by moderately increasing total assets;assets by increasing single-family, mortgage loans and higher yielding loans (i.e., multi-family, commercial real estate, construction and commercial business loans).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'sCorporation’s long-term strategy is for moderate growth, management recognizes that growth may not occur as a result of weaknesses in general economic conditions.

Mortgage banking36

Saleable single-family mortgage loan operations primarily consist of the origination and sale of mortgage loans secured by single-family residences. The primary sources of income in the saleable mortgage bankingloan operations are gain on sale of loans and certain fees collected from borrowers in connection with the loan origination process. TheOn February 4, 2019, the Corporation will continueannounced that it was in the best interests of the Corporation to modifyscale back saleable single-family mortgage loan originations and improve on its efforts to increase the volume of portfolio single-family mortgage loan originations.

Investment services operations including the numberprimarily consist of mortgage banking personnel, in responseselling alternative investment products such as annuities and mutual funds to the rapidly changing mortgage banking environment.  Changes may includeBank’s depositors. Investment services and trustee services contribute a different product mix, further tighteningvery small percentage of underwriting standards, variations in its operating expenses or a combination of these and other changes.gross revenue.

Provident Financial Corp performs trustee services for the Bank'sBank’s real estate secured loan transactions and has in the past held, and may in the future hold, real estate for investment. 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.

There are a number of risks associated with the business activities of the Corporation, many of which are beyond the Corporation'sCorporation’s control, including: changes in accounting principles, laws, regulation, interest rates and the economy, among others.  The Corporation attempts to mitigate many of these risks through prudent banking practices, such as interest rate risk management, credit risk management, operational risk management, and liquidity risk management.  The California economic environment presents heightened risk for the Corporation primarily with respect to real estate values and loan delinquencies. Since the majority of the Corporation'sCorporation’s loans are secured by real estate located within California, significant declines in the value of California real estate may also inhibit the Corporation'sCorporation’s ability to recover on defaulted loans by selling the underlying real estate.


Off-Balance Sheet Financing Arrangements and Contractual Obligations

Commitments and Derivative Financial Instruments.  The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit, in the form of originating loans or providing funds under existing lines of credit, loan sale agreements to third parties and option contracts.  These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the accompanying Condensed Consolidated Statements of Financial Condition.  The Corporation'sCorporation’s exposure to credit loss, in the event of non-performance by the counterparty to these financial instruments, is represented by the contractual amount of these instruments.  The Corporation uses the same credit policies in entering into financial instruments with off-balance sheet risk as it does for on-balance sheet instruments.  For a discussion on commitments and derivative financial instruments, see Note 7Notes 6 and 10 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements.

37

Contractual Obligations.  The following table summarizes the Corporation'sCorporation’s contractual obligations at September 30, 20182019 and the effect these obligations are expected to have on the Corporation'sCorporation’s liquidity and cash flows in future periods:
45
 Payments Due by Period  Payments Due by Period 
(In Thousands) 
Less than
1 year
  
1 to less
than 3 years
  
3 to
5 years
  
Over
5 years
  Total  
Less than
1 year
  
1 to less
than 3
years
  
3 to
5 years
  
Over
5 years
  Total 
Operating obligations $2,708  $4,449  $1,920  $639  $9,716  $2,013  $3,527  $628  $240  $6,408 
Pension benefits  248   496   497   6,450   7,691  253  507  507  6,186  7,453 
Time deposits  124,148   86,996   24,161   1,372   236,677  103,402  65,967  24,244  866  194,479 
FHLB – San Francisco advances  12,752   35,853   32,851   41,018   122,474  3,153  75,496  42,043  20,294  140,986 
FHLB – San Francisco letter of credit  8,000   —   —   —   8,000  13,000  —  —  —  13,000 
FHLB – San Francisco MPF credit enhancement (1)
  —   —   —   2,458   2,458   —   —   —   2,458   2,458 
Total $147,856  $127,794  $59,429  $51,937  $387,016  $121,821  $145,497  $67,422  $30,044  $364,784 

(1)
Represents the potential future obligation for loans previously sold by the Bank to the FHLB – San Francisco under its Mortgage Partnership Finance ("MPF"(“MPF”) program.  As of September 30, 2018,2019, the Bank serviced $11.4$8.8 million of loans under this program.  The estimated amounts by period are based on historical loss experience.

The expected obligation for time deposits and FHLB – San Francisco advances include anticipated interest accruals based on the respective contractual terms.

In addition to the off-balance sheet financing arrangements and contractual obligations mentioned above, the Corporation has derivatives and other financial instruments with off-balance sheet risks as described in Note 7 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements.


Comparison of Financial Condition at September 30, 20182019 and June 30, 20182019

Total assets decreased $18.1increased $20.4 million, or two percent, to $1.16$1.11 billion at September 30, 20182019 from $1.18$1.08 billion at June 30, 2018.2019.  The decreaseincrease was primarily attributable to decreasesan increase in loans held for investment, loans held for sale and investment securities, partly offset by an increasedecreases in cash and cash equivalents.equivalents and investment securities.

Total cash and cash equivalents, primarily excess cash deposited with the Federal Reserve Bank of San Francisco, increased $35.6decreased $16.1 million, or 8223 percent, to $78.9$54.5 million at September 30, 20182019 from $43.3$70.6 million at June 30, 2018.2019.  The increasedecrease in the total cash and cash equivalents was primarily attributable to the decreasesutilization of cash to fund the increase in loans held for sale, loans held for investment, and investment securities, partly offsetwhich was supplemented by the payoff of short-term borrowings and time deposits that matured during the first three months of fiscal 2019.an increase in borrowings.

Investment securities (held to maturity and available for sale) decreased $8.7$9.5 million, or nine percent, to $86.6$90.6 million at September 30, 20182019 from $95.3$100.1 million at June 30, 2018.2019. The decrease was primarily the result of scheduled and accelerated principal payments on mortgage-backed securities during the first three months of fiscal 2019.2020. For further analysis on investment securities, see Note 54 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements of this Form 10-Q.

Loans held for investment decreased $25.6increased $44.4 million, or threefive percent, to $877.1$924.3 million at September 30, 20182019 from $902.7$879.9 million at June 30, 2018,2019, primarily due to a $21.2$40.6 million or four percent declineincrease in multi-family loans.  During the first three months of fiscal 2019,2020, the Corporation originated $36.7$30.2 million of loans held for investment, consisting primarily of multi-family and single-family loans and also purchased $63.2 million in multi-family loans.  During the first three months of fiscal 2019, the Corporation did not purchase anyand single-family loans held for investment. Total loan principal payments during the first three months of fiscal 20192020 were $62.9$50.8 million, up 45down 19 percent from $43.4$62.9 million during the comparable period in fiscal 2018. Single-family2019. The single-family loans held for investment decreased $7.3 million, or
46
two percent, to $307.5 millionbalance at September 30, 2018 from $314.8 million at2019 and June 30, 2018,2019 was $328.3 million and $325.0 million, respectively, and represented approximately 35 percent and 37 percent of loans held for investment, for both dates.respectively.


38
The tables below describe the geographic dispersion of gross real estate secured loans held for investment at September 30, 20182019 and June 30, 2018,2019, as a percentage of the total dollar amount outstanding:

As of September 30, 20182019:
  
Inland
Empire
  
Southern
California(1)
  
Other
California
  
Other
States
  Total 
Loan Category Balance  %  Balance  %  Balance  %  Balance  %  Balance  % 
Single-family $101,646   31%
 $146,556   45%
 $79,118   24%
 $1,012   —%
 $328,332   100%
Multi-family  71,578   15%
  300,295   63%
  107,403   22%
  321   —%
  479,597   100%
Commercial real
  estate
  29,401   26%
  52,886   48%
  28,365   26%
  —   —%
  110,652   100%
Construction  947   16%
  4,302   73%
  663   11%
  —   —%
  5,912   100%
Total $203,572   22%
 $504,039   55%
 $215,549   23%
 $1,333   —%
 $924,493   100%
(Dollars In Thousands) Inland
Empire
  
Southern
California (1)
  
Other
California
  
Other
States
  Total 
Loan Category Balance  %  Balance  %  Balance  %  Balance  %  Balance  % 
Single-family $109,033   36% $142,685   46% $54,698   18% $1,064   —% $307,480   100%
Multi-family  72,770   16%  271,686   60%  110,029   24%  336   —%  454,821   100%
Commercial real
    estate
  32,495   29%  50,418   45%  29,113   26%  —   —%  112,026   100%
Construction  823   9%  7,628   85%  505   6%  —   —%  8,956   100%
Other  —   —%  —   —%  167   100%  —   —%  167   100%
Total $215,121   24% $472,417   54% $194,512   22% $1,400   —% $883,450   100%

(1)
Other than the Inland Empire.

As of June 30, 20182019:

  
Inland
Empire
  
Southern
California(1)
  
Other
California
  
Other
States
  Total 
Loan Category Balance  %  Balance  %  Balance  %  Balance  %  Balance  % 
Single-family $104,967   33%
 $146,963   45%
 $71,997   22%
 $1,025   —%
 $324,952   100%
Multi-family  70,241   16%
  272,282   62%
  96,192   22%
  326   —%
  439,041   100%
Commercial real
  estate
  30,551   27%
  54,010   48%
  27,367   25%
  —   —%
  111,928   100%
Construction  525   11%
  3,579   77%
  534   12%
  —   —%
  4,638   100%
Other  —   —%
  —   —%
  167   100%
  —   —%
  167   100%
Total $206,284   24%
 $476,834   54%
 $196,257   22%
 $1,351   —%
 $880,726   100%
(Dollars In Thousands)  Inland
Empire
  
Southern
California (1)
  
Other
California
  
Other
States
  Total 
Loan Category Balance  %  Balance  %  Balance  %  Balance  %  Balance  % 
Single-family $110,510   35% $149,261   48% $53,960   17% $1,077   —% $314,808   100%
Multi-family  76,473   16%  287,174   60%  109,684   23%  2,677   1%  476,008   100%
Commercial real estate  32,224   29%  47,903   44%  29,599   27%  —   —%  109,726   100%
Construction  208   3%  6,763   90%  505   7%  —   —%  7,476   100%
Other  —   —%  —   —%  167   100%  —   —%  167   100%
Total $219,415   24% $491,1011   54% $193,915   21% $3,754   1% $908,185   100%

(1)
Other than the Inland Empire.

Loans held for sale decreased $17.5 million, or 18 percent, to $78.8 million at September 30, 2018 from $96.3 million at June 30, 2018.  The decrease was primarily due to the timing difference between loan fundings and loan sale settlements. Total loans originated for sale during the quarter ended September 30, 2018 was $196.3 million as compared to $241.6 million during the quarter ended June 30, 2018.

Total deposits decreased $5.5$9.6 million, or one percent, to $902.1$831.7 million at September 30, 20182019 from $907.6$841.3 million at June 30, 2018.2019.  Transaction accounts decreased slightly$7.5 million, or one percent, to $669.5$640.6 million at September 30, 20182019 from $670.0$648.1 million at June 30, 2018,2019, while time deposits decreased $5.0$1.9 million, or twoone percent, to $232.6$191.2 million at September 30, 20182019 from $237.6$193.1 million at June 30, 2018. The change in deposit mix was consistent with the Corporation's marketing strategy to promote transaction accounts and the strategic decision to increase the percentage of lower cost checking and savings accounts in its deposit base and decrease the percentage of time deposits by competing less aggressively for time deposits.2019.

Total borrowings decreased $15.1increased $30.0 million, or 1230 percent, to $111.1$131.1 million at September 30, 20182019 as compared to $126.2$101.1 million at June 30, 2018,2019, due to additional long-term borrowing during the maturityfirst three months of short-term borrowings.fiscal 2020. The borrowings were primarily comprised of long-term FHLB - San Francisco advances used for interest rate risk management purposes.

47
Total stockholders'stockholders’ equity increased $1.2$1.6 million, or one percent, to $121.7$122.2 million at September 30, 20182019 from $120.5$120.6 million at June 30, 2018,2019, primarily as a result of net income of $1.8$2.6 million and the amortization of stock-based compensation benefits during the first three months of fiscal 2019,$444,000, partly offset by $1.0 million of quarterly cash dividends paid to shareholders and stock repurchases from restrictedof $346,000 during the first three months of fiscal 2020. The Corporation repurchased 16,924 shares of its common stock recipients to fund their withholding tax obligations.during the quarter ended September 30, 2019 at an average cost of $20.41 per share.


39
Comparison of Operating Results for the Quarters Ended September 30, 20182019 and 20172018

The Corporation'sCorporation’s net income for the first quarter of fiscal 20192020 was $2.6 million, up 41 percent from $1.8 million a substantial improvement as compared to the net loss of $225,000 in the same period of fiscal 2018.  The improvement in2019. Compared to the net result forsame quarter last year, the first quarter of fiscal 2019increase was primarily attributable to the $2.8 million litigation settlement expense recorded in otherlower non-interest expense in the first quarter of fiscal 2018 (not replicated this quarter), a $1.0 million decrease in salariesexpenses and employee benefits expense, a $406,000 improvement in the provision for loan losses to a $237,000 recovery and a $239,000 increase inhigher net interest income;income, partly offset by a $1.7 million decrease in the gain on sale of loans and an $824,000 increase in the provision for income taxes.lower non-interest income.

The Corporation'sCorporation’s efficiency ratio, defined as non-interest expense divided by the sum of net interest income and non-interest income, improved to 8468 percent for the first quarter of fiscal 20192020 from 10284 percent in the same period of fiscal 2018.2019.

Return (loss) on average assets increased 7132 basis points to 0.630.95 percent in the first quarter of fiscal 20192020 from (0.08)0.63 percent in the same period last year; and return (loss)year. Return on average equity increased to 6.03was 8.46 percent in the first quarter of fiscal 2019 from (0.70)2020 as compared to 6.03 percent in the same period last year.

Diluted earnings (loss) per share for the first quarter of fiscal 20192020 were $0.24, a significant improvement$0.33, up 38 percent from $(0.03)$0.24 in the same period last year.

Net Interest Income:

For the Quarters Ended September 30, 20182019 and 2017.2018.  Net interest income increased by $239,000,$225,000, or threetwo percent, to $9.4$9.6 million for the first quarter of fiscal 20192020 as compared to the same period in fiscal 2018,2019, as a result of a higher net interest margin, partly offset by a lower average earninginterest-earning asset balance. The net interest margin increased 1334 basis points to 3.303.64 percent in the first quarter of fiscal 20192020 from 3.173.30 percent in the same period of fiscal 2018,2019, primarily due to an increase in the average yield on interest-earning assets partly offset byand a slight increasedecrease in the average cost of interest-bearing liabilities. The weighted-average yield on interest-earning assets increased by 1433 basis points to 3.884.21 percent in the first quarter of fiscal 2020 from 3.743.88 percent in the same quarter last year, whileand the weighted-average cost of interest-bearing liabilities increaseddecreased by twoone basis pointspoint to 0.640.63 percent for the first quarter of fiscal 20192020 as compared to 0.620.64 percent in the same quarter last year. The increase in the average yield of interest-earning assets was primarily due to increasesan increase in the average yield of loans receivable, althoughall interest-earning assets resulting primarily from higher market interest rates, except the average yield increased for all interest-earning assets.on FHLB – San Francisco stock which was unchanged. The average balance of interest-earning assets decreased $16.7$82.0 million, or oneseven percent, to $1.13$1.05 billion in the first quarter of fiscal 20192020 from $1.15$1.13 billion in the comparable period of fiscal 2018,2019, primarily reflecting a decreasedecreases in the average balance of loans receivable and interest-earning deposits, partly offset by increasesan increase in the average balance of investment securitiessecurities. The average balance of interest-bearing liabilities decreased by $80.4 million, or eight percent, to $942.5 million in the first quarter of fiscal 2020 from $1.02 billion in the same quarter last year. The decreases in the average balances of both loans receivable and interest-earning deposits.interest-bearing liabilities were primarily due to the scaling back of saleable single-family mortgage loan originations and corresponding reduction in loans held for sale to none at September 30, 2019 compared to $78.8 million at September 30, 2018.

Interest Income:

For the Quarters Ended September 30, 20182019 and 2017.2018.  Total interest income increased by $255,000,$78,000, or twoone percent, to $11.0$11.1 million for the first quarter of fiscal 2019 from $10.72020 as compared to $11.0 million infor the same quarter of fiscal 2018.2019.  The increase was primarily due to higheran increase in interest income onfrom investment securities, partly offset by decreases in interest earned from loans receivable and interest-earning deposits.

Interest income on loans receivable increased $17,000(including loans held for sale) decreased $99,000, or one percent, to $10.2$10.1 million in the first quarter of fiscal 20192020 as compared to the same quarter of fiscal 2018.2019.  This increasedecrease was attributable to a lower average loan balance, partly offset by a higher average loan yield mostlyreflecting the rise in interest rates over the last year. The average balance of loans receivable decreased by $63.8 million, or seven percent, to $903.3 million for the first quarter of fiscal 2020 from $967.1 million in the same quarter of fiscal 2019, primarily due to a decrease in average loans held for sale attributable to the scaling back of single-family mortgage loan originations, partly offset by a loweran increase in average loan
48
balance.loans held for investment. The average loans receivable yield during the first quarter of fiscal 20192020 increased 1825 basis points to 4.214.46 percent

40
from 4.034.21 percent during the same quarter last year, primarily due to an increase in the average yield of loans held for investment and an increase in the average yield of loans held for sale with a lower percentage of loans held for sale to total loans receivable. The average balance of loans receivable decreased by $40.5 million, or four percent, to $967.1 million for the first quarter of fiscal 2019 from $1.01 billion in the same quarter of fiscal 2018, primarily due to a decrease in average loans held for sale attributable to a decrease in mortgage banking activity and, to a lesser extent, a decrease in average loans held for investment.

Loans receivable is comprised of loans held for investment and loans held for sale. The average balance of loans held for investment decreased $15.0increased $10.4 million, or twoone percent, to $892.9$903.3 million during the first quarter of fiscal 20192020 from $907.9$892.9 million in the same quarter of fiscal 2018.2019. The average yield on the loans held for investment increased by 1428 basis points to 4.184.46 percent in the first quarter of fiscal 20192020 from 4.044.18 percent in the same quarter of fiscal 2018. The average balance of2019. There were no loans held for sale however, decreased $25.5 million, or 26 percent, to $74.2 million during the first quarter of fiscal 2019 from $99.7 million in the same quarter of fiscal 2018.  The average yield on the loans held for sale increased by 66 basis points to 4.59 percent in the first quarter of fiscal 2019 from 3.932020 as compared to the average balance of $74.2 million with an average yield of 4.59 percent in the same quarter of fiscal 2018.2019.

Interest income from investment securities increased $88,000,$269,000, or 3478 percent, to $345,000$614,000 in the first quarter of fiscal 20192020 from $257,000$345,000 for the same quarter of fiscal 2018.2019. This increase was attributable to a higher average balanceyield and, to a much lesser extent, a higher average yield.  The average balance of investment securities increased $15.8 million, or 21 percent, to $91.3 million in the first quarter of fiscal 2019 from $75.5 million in the same quarter of fiscal 2018.  The increase in average balance of investment securities was primarily the result of purchases of mortgage-backed securities, partly offset by scheduled and accelerated principal payments on mortgage-backed securities.balance. The average investment securities yield increased 15105 basis points to 1.512.56 percent in the first quarter of fiscal 20192020 from 1.361.51 percent in the same quarter of fiscal 2018.2019. The increase in the average investment securities yield was primarily attributable to the purchases of investment securities which had higher average yields than the existing portfolio and the repricing of adjustable rate mortgage-backed securities to higher interest rates, partly offset by accelerated amortization of purchase premiums resulting from accelerated principal payments. The average balance of investment securities increased $4.6 million, or five percent, to $95.9 million in the first quarter of fiscal 2020 from $91.3 million in the same quarter of fiscal 2019. The increase in the average balance of investment securities was primarily the result of purchases of mortgage-backed securities, partly offset by scheduled and accelerated principal payments on mortgage-backed securities.

The FHLB – San Francisco cash dividend received in the first quarter of fiscal 20192020 was $143,000, up one percentunchanged from $141,000 in the same quarter of fiscal 2018.2019. The average yield increased two basis points to 6.98 percentbalance of FHLB – San Francisco stock in the first quarter of fiscal 20192020 remained unchanged at $8.2 million as compared to 6.96 percent in the comparablesame quarter last year.of fiscal 2019 and the average yield also remained unchanged at 6.98 percent.

Interest income from interest-earning deposits, primarily cash deposited at the Federal Reserve Bank of San Francisco, was $338,000$246,000 in the first quarter of fiscal 2019, up 782020, down 27 percent from $190,000$338,000 in the same quarter of fiscal 2018.2019. The increasedecrease was primarily due to a higherlower average yield, and to a lesser extent,balance, partly offset by a higher average yield. The average balance of the interest-earning deposits in the first quarter of fiscal 2019 as compared to2020 was $44.5 million, a decrease of $22.8 million or 34 percent, from $67.3 million in the same quarter last year.of fiscal 2019. The average yield earned on interest-earning deposits increased 7120 basis points to 1.962.16 percent in the first quarter of fiscal 20192020 from 1.251.96 percent in the comparable quarter last year, due primarily to the increases in the targeted federal funds rate overin 2018, partly offset by recent rate decreases in the last year.  The average balance oftargeted federal funds rate in 2019.

Interest Expense:

For the interest-earning depositsQuarters Ended September 30, 2019 and 2018.  Total interest expense decreased $147,000, or nine percent to $1.5 million in the first quarter of fiscal 2019 was $67.3 million, an increase of $7.9 million or 13 percent,2020 from $59.4$1.6 million in the samecomparable quarter of fiscal 2018.

Interest Expense:

For the Quarters Ended September 30, 2018 and 2017.  Total interest expense for the first quarter of fiscal 2019 increased slightly to $1.6 million as compared to the same period last year,2019. This decrease was attributable primarily to a higher interest expenselower average balance on borrowings, partly offset by a lower interest expense on deposits.both deposits and borrowings.

Interest expense on deposits for the first quarter of fiscal 20192020 was $880,000$776,000 as compared to $891,000$880,000 for the same period last year, a decrease of $11,000,$104,000, or one12 percent.  The decrease in interest expense on deposits was primarily attributable to a lower average balance partly offset byand a slightly higherlower average cost of deposits. The average balance of deposits decreased $20.1$72.1 million, or twoeight percent, to $902.9$830.8 million during the quarter ended September 30, 20182019 from $923.0$902.9 million during the same period last year. The decrease in the average balance was primarily attributable to a decreasedecreases in time deposits and, to a lesser extent, savings deposits, partly offset by
49
an increase in transaction accounts.checking and money market deposits. The average cost of deposits remained relatively stable, increasing onedecreasing by two basis pointpoints to 0.390.37 percent during the first quarter of fiscal 20192020 from 0.380.39 percent during the same quarter last year.  The increasedecrease in the average cost of deposits was attributable primarily to a higher average cost of time deposits, partly offset by a lower percentage of time deposits to the total deposit balance.balance, partly offset by a seven basis-point increase in the average cost. Strategically, the Corporation has been

41
promoting transaction accounts and competing less aggressively for time deposits.  The Corporation believes the increase in transaction accounts was also attributable to the impact of depositors seeking an alternative to lower yielding time deposits in anticipation of higher interest rates. The average balance of transaction accounts to total deposits in the first quarter of fiscal 20192020 was 7477 percent, compared to 7174 percent in the same period of fiscal 2018.2019.

Interest expense on borrowings, consisting of FHLB – San Francisco advances, for the first quarter of fiscal 2019 increased $27,000,2020 decreased $43,000, or foursix percent, to $763,000$720,000 from $736,000$763,000 for the same period last year.  The increasedecrease in interest expense on borrowings was the result of a higherlower average balance, partly offset by a lowerhigher average cost. The average balance of borrowings increased $5.9decreased $8.4 million, or fiveseven percent, to $120.0$111.6 million during the quarter ended September 30, 20182019 from $114.1$120.0 million during the same period last year, primarily due to a higher balance of short-term borrowings.year. The average cost of borrowings decreasedincreased four basis points to 2.522.56 percent for the quarter ended September 30, 20182019 from 2.562.52 percent in the same quarter last year. The decreaseincrease in the average cost of advancesborrowings was primarily due to the higher average balanceutilization of short-term borrowings with ana lower interest rate than the weighted average cost below the existinginterest rate of all borrowings in the first quarter of fiscal 2018.2019.





42
50

The following tables present the average balance sheets for the quarters ended September 30, 20182019 and 2017,2018, respectively:

Average Balance Sheets
  Quarter Ended
September 30, 2019		  Quarter Ended
September 30, 2018		 
(Dollars In Thousands) Average
Balance		  Interest  Yield/
Cost		  Average
Balance		  Interest  Yield/
Cost		 
Interest-earning assets:                  
Loans receivable, net (1)
 $903,272  $10,075   4.46%
 $967,104  $10,174   4.21%
Investment securities  95,945   614   2.56%
  91,301   345   1.51%
FHLB – San Francisco stock  8,199   143   6.98%
  8,199   143   6.98%
Interest-earning deposits  44,511   246   2.16%
  67,344   338   1.96%
                         
Total interest-earning assets  1,051,927   11,078   4.21%
  1,133,948   11,000   3.88%
                         
Non interest-earning assets  31,408           30,280         
                         
Total assets $1,083,335          $1,164,228         
                         
Interest-bearing liabilities:                        
Checking and money market accounts (2)
 $381,211  $110   0.11%
 $377,651  $108   0.11%
Savings accounts  259,651   134   0.20%
  288,472   151   0.21%
Time deposits  189,958   532   1.11%
  236,754   621   1.04%
                         
Total deposits  830,820   776   0.37%
  902,877   880   0.39%
                         
Borrowings  111,641   720   2.56%
  120,013   763   2.52%
                         
Total interest-bearing liabilities  942,461   1,496   0.63%
  1,022,890   1,643   0.64%
                         
Non interest-bearing liabilities  19,692           20,333         
                         
Total liabilities  962,153           1,043,223         
                         
Stockholders’ equity  121,182           121,005         
Total liabilities and stockholders’ equity $1,083,335          $1,164,228         
                         
Net interest income     $9,582          $9,357     
                         
Interest rate spread (3)
          3.58%
          3.24%
Net interest margin (4)
          3.64%
          3.30%
Ratio of average interest-earning assets to
   average interest-bearing liabilities
          111.61%    

          110.86%   

Return on average assets          0.95%
          0.63%
Return on average equity          8.46%
          6.03%
  
Quarter Ended
September 30, 2018
  
Quarter Ended
September 30, 2017
 
(Dollars In Thousands) 
Average
Balance
  Interest  
Yield/
Cost
  
Average
Balance
  Interest  
Yield/
Cost
 
Interest-earning assets:                  
Loans receivable, net (1)
 $967,104  $10,174   4.21% $1,007,579  $10,157   4.03%
Investment securities  91,301   345   1.51%  75,470   257   1.36%
FHLB – San Francisco stock  8,199   143   6.98%  8,108   141   6.96%
Interest-earning deposits  67,344   338   1.96%  59,445   190   1.25%
                         
Total interest-earning assets  1,133,948   11,000   3.88%  1,150,602   10,745   3.74%
                         
Non interest-earning assets  30,280           31,528         
                         
Total assets $1,164,228          $1,182,130         
                         
Interest-bearing liabilities:                        
Checking and money market accounts (2)
 $377,651   108   0.11% $373,217   103   0.11%
Savings accounts  288,472   151   0.21%  286,705   149   0.21%
Time deposits  236,754   621   1.04%  263,123   639   0.96%
                         
Total deposits  902,877   880   0.39%  923,045   891   0.38%
                         
Borrowings  120,013   763   2.52%  114,148   736   2.56%
                         
Total interest-bearing liabilities  1,022,890   1,643   0.64%  1,037,193   1,627   0.62%
                         
Non interest-bearing liabilities  20,333           16,883         
                         
Total liabilities  1,043,223           1,054,076         
                         
Stockholders' equity  121,005           128,054         
Total liabilities and stockholders' equity $1,164,228          $1,182,130         
                         
Net interest income     $9,357          $9,118     
                         
Interest rate spread (3)
          3.24%          3.12%
Net interest margin (4)
          3.30%          3.17%
Ratio of average interest-earning assets to
   average interest-bearing liabilities
          110.86%          110.93%
Return (loss) on average assets          0.63%          (0.08)%
Return (loss) on average equity          6.03%          (0.70)%

(1)
Includes loans held for sale and non-performing loans, as well as net deferred loan cost amortization of $376$160 and $207$376 for the quarters ended September 30, 2019 and 2018, respectively. The average balance of loans held for sale was $0 and 2017,$74.2 million during the quarters ended September 30, 2019 and 2018, respectively.
(2)
Includes the average balance of non interest-bearing checking accounts of $82.2$81.3 million and $79.7$82.2 million during the quarters ended September 30, 20182019 and 2017,2018, respectively.
(3)
Represents the difference between the weighted-average yield on all interest-earning assets and the weighted-average rate on all interest-bearing liabilities.
(4)
Represents net interest income before provision for loan losses as a percentage of average interest-earning assets.

43
51
The following tables set forth the effects of changing rates and volumes on interest income and expense for the quarters ended September 30, 20182019 and 2017,2018, respectively.  Information is provided with respect to the effects attributable to changes in volume (changes in volume multiplied by prior rate), the effects attributable to changes in rate (changes in rate multiplied by prior volume) and the effects attributable to changes that cannot be allocated between rate and volume.

Rate/Volume Variance
  Quarter Ended September 30, 2019 Compared
To Quarter Ended September 30, 2018
Increase (Decrease) Due to		 
(In Thousands) Rate  Volume  Rate/
Volume		  Net 
Interest-earning assets:            
     Loans receivable (1)
 $613  $(672) $(40) $(99)
     Investment securities  239   18   12   269 
     FHLB – San Francisco stock  —   —   —   — 
     Interest-earning deposits  31   (112)  (11)  (92)
Total net change in income on interest-earning assets  883   (766)  (39)  78 
                 
Interest-bearing liabilities:                
     Checking and money market accounts  —   2   —   2 
     Savings accounts  (3)  (15)  1   (17)
     Time deposits  42   (123)  (8)  (89)
     Borrowings  11   (53)  (1)  (43)
Total net change in expense on interest-bearing liabilities  50   (189)  (8)  (147)
Net increase (decrease) in net interest income $833  $(577) $(31) $225 
  
Quarter Ended September 30, 2018 Compared
To Quarter Ended September 30, 2017
Increase (Decrease) Due to
 
(In Thousands) Rate  Volume  
Rate/
Volume
  Net 
Interest-earning assets:            
     Loans receivable (1)
 $443  $(408) $(18) $17 
     Investment securities  28   54   6   88 
     FHLB – San Francisco stock  —   2   —   2 
     Interest-earning deposits  109   25   14   148 
Total net change in income on interest-earning assets  580   (327)  2   255 
                 
Interest-bearing liabilities:                
     Checking and money market accounts  —   5   —   5 
     Savings accounts  —   2   —   2 
     Time deposits  51   (64)  (5)  (18)
     Borrowings  (10)  38   (1)  27 
Total net change in expense on interest-bearing liabilities  41   (19)  (6)  16 
Net increase (decrease) in net interest income $539  $(308) $8  $239 

(1)
Includes loans held for sale and non-performing loans.  For purposes of calculating volume, rate and rate/volume variances, non-performing loans were included in the weighted-average balance outstanding.

Provision (Recovery) for Loan Losses:

For the Quarters Ended September 30, 20182019 and 2017.2018.  During the first quarter of fiscal 2019,2020, the Corporation recorded a recovery from the allowance for loan losses of $237,000, in contrast$181,000, as compared to a $169,000 provision for loan lossesrecovery of $237,000 in the same period of fiscal 2018.2019.  The recovery recorded infrom the firstallowance for loan losses during this quarter of fiscal 2019and same quarter last year was primarily attributable to the decreaseimproving risk profile of the loan portfolio as reflected in loans held for investment during the first quarter of fiscal 2019.asset quality ratios and loan balances shifting to lower risk categories from higher risk categories. Non-performing loans, net of the allowance for loan losses and fair value adjustments wasdecreased 16 percent to $5.2 million at September 30, 2019 from $6.2 million at June 30, 2019 and $6.9 million at September 30, 2018 as compared to $6.1 million at June 30, 2018 and $8.0 million at September 30, 2017.2018. Net loan recoveries in the first quarter of fiscal 20192020 were $7,000$34,000 or zero0.02 percent (annualized) of average loans receivable, compared to net loan charge-offsrecoveries of $145,000$7,000 or 0.060.00 percent (annualized) of average loans receivable in the same quarter of fiscal 2018.2019. Total classified loans, net of the allowance for loan losses and fair value adjustments, were $13.0 million at September 30, 2019 as compared to $16.2 million at June 30, 2019 and $13.4 million at September 30, 2018 as compared to $14.9 million at June 30, 20182018. Classified loans net of the allowance for loan losses and $12.9 millionfair value adjustments at September 30, 2017. Classified loans2019 were comprised of $5.1 million and $7.5$6.9 million of loans in the special mention category and $8.3$6.1 million of loans in the substandard category as compared to $8.6 million of loans in the special mention category and  $7.4$7.6 million of loans in the substandard category at September 30, 2018 and June 30, 2018, respectively.2019.

The allowance for loan losses was determined through quantitative and qualitative adjustments including the Bank's charge-off experience and reflects the impact on loans held for investment from the current general economic conditions of the U.S. and

44
California economies such as the improving unemployment rate and higher home prices in California.  See related discussion of "Asset Quality" below.“Asset Quality.”

52
At September 30, 2018,2019, the allowance for loan losses was $7.2$6.9 million, comprised of collectively evaluated allowances of $7.1$6.8 million and individually evaluated allowances of $129,000;$54,000; in comparison to the allowance for loan losses of $7.4$7.1 million at June 30, 2018,2019, comprised of collectively evaluated allowances of $7.2$7.0 million and individually evaluated allowances of $157,000.$130,000. The allowance for loan losses as a percentage of gross loans held for investment was 0.810.74 percent at September 30, 2018, unchanged from2019 as compared to 0.80 percent at June 30, 2018.2019. Management considers, based on currently available information, the allowance for loan losses sufficient to absorb potential losses inherent in loans held for investment.  For further analysis on the allowance for loan losses, see Note 65 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements.

Non-Interest Income:

For the Quarters Ended September 30, 20182019 and 2017.2018.  Total non-interest income decreased $1.9$3.4 million, or 3076 percent, to $4.5$1.1 million for the quarter ended September 30, 20182019 from $6.4$4.5 million for the same period last year.  The decrease was primarily attributable to a decrease in the net gain on sale of loans during the current quarter as compared to the comparable period last year.a loss on sale of loans.

The net gain on sale of loans decreased $1.7$3.2 million, or 35103 percent, to $3.1 milliona net loss of $86,000 for the first quarter of fiscal 20192020 from $4.8a net gain of $3.1 million in the same quarter of fiscal 2018 reflecting2019. The net loss in the impactfirst quarter of a lowerfiscal 2020 was primarily attributable to loan sale premium refunds from early payoff of loans previously sold. There was no loan sale volume partly offset by a higher average loan sale margin.  Total loan sale volume, which includesin the net change in commitments to extend credit on loans to be held for sale, decreased $210.4 million or 54 percentfirst quarter of fiscal 2020, as compared to $181.8 million in the quarter ended September 30, 2018 from $392.2 million in the comparable quarter last year.  The decrease in loan sale volume was attributable to the decrease in mortgage banking activity as compared to the same period last year.  The total refinance loans as a percentage of total loans originated by PBM during the first quarter of fiscal 2019 was 30 percent, down from 42 percent in the same quarter of fiscal 2018.  Thewith an average loan sale margin for PBM increased 46 basis points toof 1.70 percent in the first quarter of fiscal 2019 from 1.24 percent in the same period of fiscal 2018. The increase in the average loan sale margin was the result of a higher percentage of retail loan production (which generally has higher loan sale margins) versus wholesale loan production and maintaining pricing discipline throughout the quarter. The gain on sale of loans includes an unfavorable fair-value adjustment on loans held for sale and derivative financial instruments (commitments to extend credit, commitments to sell loans, commitments to sell mortgage-backed securities, and option contracts) pursuant to ASC 815 and ASC 825 that amounted to a net loss of $489,000 in the first quarter of fiscal 2019 as compared to an unfavorable fair-value adjustment net loss of $94,000 in the same period last year. The fair-value adjustment on loans held for sale and derivative financial instruments is consistent with the Bank's mortgage banking activity and the volatility of mortgage interest rates. As of September 30, 2018, the fair value of derivative financial instruments pursuant to ASC 815 and ASC 825 was $2.4 million, compared to $2.9 million at June 30, 2018 and $4.9 million at September 30, 2017.percent.

Non-Interest Expense:

For the Quarters Ended September 30, 20182019 and 2017.2018.  Total non-interest expense in the quarter ended September 30, 20182019 was $11.7$7.2 million, a decrease of $4.0$4.5 million, or 2638 percent, as compared to $15.7$11.7 million in the quarter ended September 30, 2017.2018. The decrease was primarily a resultattributable to scaling back the origination of a decreasesaleable single-family mortgage loans resulting in other non-interest expense and a decreasesignificant reductions in salaries and employee benefits expense.expenses due to lower incentive compensation and staff reductions and premises and occupancy expenses due to the closing of loan production offices, as well as reductions in other related expenses.

Total salaries and employee benefits expense decreased $1.0$3.3 million, or 1140 percent, to $8.3$5.0 million in the first quarter of fiscal 20192020 from $9.3$8.3 million in the same period of fiscal 2019. Total full-time equivalent employees were 188 at September 30, 2019, down 175 or 48 percent from 363 at September 30, 2018.  The decrease in salaries

Total premises and employee benefits expense was primarily related to lower variable compensation resulting from lower mortgage banking loan originations and staff reductions in mortgage banking, partly offset by an increase in stock-based compensation resulting from the vesting of previously awarded stock options and restricted stock. Total loan originations (including loans originated for investment and loans originated for sale)occupancy expenses decreased $204.2 million,$467,000, or 4735 percent, to $233.0 million$878,000 in the first quarter of fiscal 20192020 from $437.2 million in the comparable quarter of fiscal 2018. Total full-time equivalent employees in the mortgage banking division was 169 at September 30, 2018, down 29 percent from 237 at September 30, 2017.

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Total other non-interest expenses decreased $3.0 million, or 77 percent, to $907,000 in the first quarter of fiscal 2019 from $3.9$1.3 million in the same period of fiscal 2018.  The decrease was2019 due primarily attributable to the $2.75 million litigationclosures of 10 loan production offices and one retail banking center.

In addition, deposit insurance premiums and regulatory assessments decreased $181,000 due primarily to a $150,000 small bank assessment credit awarded by the FDIC and other expenses decreased by $320,000 due primarily to a $296,000 reversion of a previously recognized legal settlement expense recorded(see Part II, Item 1- Legal Proceedings) during the quarter ended September 30, 2019. The Bank has $224,000 remaining in other non-interest expensesmall bank assessment credits, which may be recognized in future periods when allowed for by the first quarter of fiscal 2018 and not replicated this quarter.FDIC consistent with insurance fund levels being met.


45
Provision (Benefit) for Income Taxes:

The income tax provision reflects accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income, adjusted for the effect of all permanent differences between income for tax and financial reporting purposes, such as non-deductible stock-based compensation, earnings from bank-owned life insurance policies and certain California tax-exempt loans, among others.  Therefore, there are fluctuations in the effective income tax rate from period to period based on the relationship of net permanent differences to income before tax.

For the Quarters Ended September 30, 20182019 and 2017.2018.  The Corporation'sCorporation’s income tax provision was $616,000$1.0 million for the first quarter of fiscal 2019, as compared to a $208,000 income tax benefit2020, up 68 percent from $616,000 in the same quarter last year. The increase in the provision for income taxes was primarily attributable to the higher income before income taxes partly offset byin the reductionfirst quarter of fiscal 2020 in comparison to the federal corporate tax rate resulting from the Tax Cuts and Jobs Act ("Tax Act").  Since the Corporation has a fiscal year end of June 30th, the reduced federal corporate income tax rate from the Tax Act for fiscal 2018 was the result of the application of a blended federal statutory tax rate of 28.06%, and is currently a flat 21% federal corporate income tax rate for fiscal 2019 and thereafter. As a result, thesame quarter last year. The effective federal and state income tax rate for the quarter ended September 30, 2019 and 2018 was 25.3 percent, down28.73% and 25.26%, respectively. The higher effective tax rate in the first quarter of fiscal 2020 was due primarily to fewer tax benefits resulting from 48.0 percentstock-based compensation activities in comparison to the same quarter last year. The Corporation believes that the effective income tax rate applied in the first quarter of fiscal 20192020 reflects its current income tax obligations.


Asset Quality

Non-performing loans, net of the allowance for loan losses and fair value adjustments, consisting of loans with collateral located in California, was $5.2 million at September 30, 2018 increased $805,000 to $6.9 million, up 13 percent2019, down from $6.1$6.2 million at June 30, 2018.2019. Non-performing loans as a percentage of loans held for investment at September 30, 20182019 was 0.78%0.47%, upimproving from 0.67%0.57% at June 30, 2018.2019.  The non-performing loans at September 30, 20182019 are comprised of 2217 single-family loans ($6.14.1 million), one construction loan ($745,000) and one commercial business loan ($64,000). This compares to the $6.1 million of non-performing loans at June 30, 2018 which were primarily comprised of 21 single-family loans ($6.01.1 million) and one commercial business loan ($64,000)38,000).  No interest accruals were made for loans that were past due 90 days or more or if the loans were deemed non-performing.

As of September 30, 2018,2019, total restructured loans decreased $411,000,$2.0 million, or eight53 percent, to $4.8$1.8 million from $5.2$3.8 million at June 30, 2018.2019.  At both September 30, 20182019 and June 30, 2018, $3.42019, $1.4 million and $1.9 million of these restructured loans were classified as non-performing.non-performing, respectively.  As of September 30, 2018, $3.12019, $1.4 million, or 6677 percent, of the restructured loans have a current payment status, consistent with their modified payment terms; this compares to $2.9$2.4 million, or 5663 percent, of restructured loans that had a current payment status, consistent with their modified payment terms as of June 30, 2018.2019.

TotalThere was no real estate owned at both September 30, 2018 was $524,000 (one single-family property located in California), a decline of $382,000 or 42 percent from $906,000 at2019 and June 30, 2018 (two single-family properties located in California).2019.

Non-performing assets, which includes non-performing loans and real estate owned, increased $423,000if any, decreased $988,000 or six16 percent to $7.4$5.2 million or 0.640.47 percent of total assets at September 30, 20182019 from $7.0$6.2 million or 0.590.57 percent of total assets at June 30, 2018.2019. Restructured loans which are performing in accordance with their modified terms and are not otherwise classified non-accrual are not included in non-performing assets.  For further analysis on non-performing loans and restructured loans, see Note 65 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements.
54
Occasionally, the Corporation is required to repurchase loans sold to Freddie Mac, Fannie Mae or other institutional investors if it is determined that such loans do not meet the credit requirements of the investor, or if one of the parties involved in the loan misrepresented pertinent facts, committed fraud, or if such loans were 90-days past due within 120 days of the loan funding date. During the first three months of fiscal 2019, the Corporation repurchased three loans totaling $253,000, including two loans that were fully charged off ($25,000). In comparison, the Corporation did not repurchase any loans from investors during the first three months of fiscal 2018 pursuant to the recourse/repurchase covenants contained in the loan sale agreement. Additional repurchase requests may have been settled that did not result in the repurchase of the loan itself.  The primary reasons for honoring the repurchase requests are borrower fraud, undisclosed liabilities on borrower applications, and documentation, verification and appraisal disputes.  For the first three months of fiscal 2019, the Corporation recorded a $33,000 recovery from the recourse liability and did not settle any claims; while for the first three months of fiscal 2018, the Corporation did not record a recourse provision and did not settle any claims.  As of September 30, 2018, the total recourse reserve for loans sold that are subject to repurchase decreased to $250,000, as compared to $283,000 at June 30, 2018 and $305,000 at September 30, 2017.

Beginning in 2008, in connection with the downturn in the real estate market, the Corporation implemented tighter underwriting standards to reduce potential loan repurchase requests, including requiring higher credit scores, generally lower debt-to-income ratios, and verification of income and assets, among other criteria.  Despite management's diligent estimate of the recourse reserve, the Corporation is still subject to risks and uncertainties associated with potentially higher loan repurchase claims from investors, and there are no assurances that the current recourse reserve will be sufficient to cover all future recourse claims.

The following table shows the summary of the recourse liability for the quarters ended September 30, 2018 and 2017:
  
For the Quarters Ended
September 30,
 
Recourse Liability 2018  2017 
(In Thousands)      
       
Balance, beginning of the period $283  $305 
Recovery from recourse liability  (33)  — 
Net settlements in lieu of loan repurchases  —   — 
Balance, end of the period $250  $305 

A decline in real estate values subsequent to the time of origination of the Corporation'sCorporation’s real estate secured loans could result in higher loan delinquency levels, foreclosures, provisions for loan losses and net charge-offs.  Real estate values and real estate markets are beyond the Corporation'sCorporation’s control and are generally affected by changes in national, regional or local economic conditions and other factors.  These factors include fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies and acts of nature, such as earthquakes, fires and national disasters particular to California where substantially all of the Corporation'sCorporation’s real estate collateral is located.  If real estate values decline from the levels described in the following tables (which were derived at the time of loan origination), the value of the real estate collateral securing the Corporation'sCorporation’s loans as set forth in the table could be significantly overstated.  The Corporation'sCorporation’s ability to recover on defaulted loans by foreclosing and selling the real estate collateral would

46
then be diminished and it would be more likely to suffer losses on defaulted loans.  The Corporation generally does not update the loan-to-value ratio ("LTV"(“LTV”) on its loans held for investment by obtaining new appraisals or broker price opinions (nor does the Corporation intend to do so in the future as a result of the costs and inefficiencies associated with completing the task) unless a specific loan has demonstrated deterioration or the Corporation receives a loan modification request from a borrower (in which case individually evaluated allowances are established, if required).  Therefore, it is reasonable to assume that the LTV ratios disclosed in the following tables may be understated or overstated in comparison to their current LTV ratios as a result of their year of origination, the subsequent general decline or improvement in real estate values that has occurred and the
55
specific location and condition of the individual properties.  The Corporation has not quantified the current LTVs of its loans held for investment nor the impact the decline or improvement in real estate values has had on the original LTVs of its loans held for investment.

The following table describes certain credit risk characteristics of the Corporation's single-family, first trust deed, mortgage loans held for investment as of September 30, 2018:
(Dollars In Thousands) 
Outstanding
Balance (1)
  
Weighted-
Average
FICO (2)
  
Weighted-
Average
LTV (3)
 
Weighted-
Average
Seasoning (4)
Interest only $1,500   619   75%0.72 years
Stated income (5)
 $66,523   730   59%12.82 years
FICO less than or equal to 660 $7,957   638   65%7.96 years
Over 30-year amortization $8,469   723   63%13.12 years

(1)
The outstanding balance presented on this table may overlap more than one category.  Of the outstanding balance, $3.3 million of "stated income," $311 of "FICO less than or equal to 660," and $625 of "over 30-year amortization" balances were non-performing.
(2)
Based on borrower's FICO scores at the time of loan origination.  The FICO score represents the creditworthiness of a borrower based on the borrower's credit history, as reported by an independent third party.  A higher FICO score indicates a greater degree of creditworthiness.  Bank regulators have issued guidance stating that a FICO score of 660 and below is indicative of a "subprime" borrower.
(3)
LTV is the ratio derived by dividing the current loan balance by the lower of the original appraised value or purchase price of the real estate collateral.
(4)
Seasoning describes the number of years since the funding date of the loan.
(5)
Stated income is defined as borrower stated income on his/her loan application which was not subject to verification during the loan origination process.

The following table summarizes the amortization schedule of the Corporation's interest only single-family, first trust deed, mortgage loans held for investment, including the percentage of those which are identified as non-performing or 30 – 89 days delinquent as of September 30, 2018:
(Dollars In Thousands) Balance  
Non-Performing (1) 
 
30 - 89 Days
Delinquent (1)
Fully amortize in the next 12 months $—   —%  —%
Fully amortize between 1 year and 5 years  1,500   —%  —%
Fully amortize after 5 years  —   —%  —%
Total $1,500   —%  —%

(1)
As a percentage of each category.

The following table summarizes the interest rate reset (repricing) schedule of the Corporation's stated income single-family, first trust deed, mortgage loans held for investment, including the percentage of those which are identified as non-performing or 30 – 89 days delinquent as of September 30, 2018:
(Dollars In Thousands) 
Balance (1)
  
Non-Performing (1)
  
30 - 89 Days
Delinquent (1) 
Interest rate reset in the next 12 months $65,802   4%  —%
Interest rate reset between 1 year and 5 years  —   —%  —%
Interest rate reset after 5 years  721   100%  —%
Total $66,523   5%  —%

56
(1)
As a percentage of each category.

The following table describes certain credit risk characteristics, geographic locations and the calendar year of loan origination of the Corporation's single-family, first trust deed, mortgage loans held for investment, at September 30, 2018:
  Calendar Year of Origination    
(Dollars In Thousands) 
2010 &
Prior
  

2011
  

2012
  

2013
  

2014
  

2015
  

2016
  

2017
  
YTD
2018
  

Total
 
Loan balance (in
  thousands)
 $109,438  $739  $2,108  $2,218  $5,879  $10,434  $29,982  $70,338  $62,439  $293,575 
Weighted-average
  LTV (1)
  59%  59%  51%  45%  64%  68%  65%  72%  71%  66%
Weighted-average
  age (in years)
  12.91   7.08   6.08   5.24   4.18   3.33   2.22   1.36   0.37   5.75 
Weighted-average
  FICO (2)
  729   724   757   753   756   740   750   738   739   737 
Number of loans  391   3   11   20   18   15   58   108   102   726 
                                         
Geographic
 breakdown (%)
                                        
Inland Empire  37%  46%  15%  45%  38%  20%  29%  33%  43%  36%
Southern
  California (3)
  52%  54%  52%  22%  34%  48%  33%  46%  49%  47%
Other California (4)
  10%  —%  33%  33%  28%  32%  38%  21%  8%  17%
Other States  1%  —%  —%  —%  —%  —%  —%  —%  —%  —%
Total  100%  100%  100%  100%  100%  100%  100%  100%  100%  100%

(1)
LTV is the ratio derived by dividing the current loan balance by the lower of the original appraised value or purchase price of the real estate collateral.
(2)
At time of loan origination.
(3)
Other than the Inland Empire.
(4)
Other than the Inland Empire and Southern California.

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The following table describes certain credit risk characteristics, geographic locations and the calendar year of loan origination of the Corporation's multi-family loans held for investment, at September 30, 2018:
  Calendar Year of Origination    
(Dollars In Thousands) 
2010 &
Prior
  

2011
  

2012
  

2013
  

2014
  

2015
  

2016
  

2017
  
YTD
2018
  

Total
 
Loan balance
  (in thousands)
 $14,283  $3,816  $10,082  $39,637  $57,562  $73,458  $114,679  $73,872  $67,432  $454,821 
Weighted-average
  LTV (1)
  36%  49%  48%  50%  51%  52%  48%  49%  46%  49%
Weighted-average
  DCR (2)
  1.74x  1.74x  1.89x  1.72x  1.68x  1.66x  1.67x  1.67x  1.56x  1.67x
Weighted-average
  age (in years)
  13.98   7.05   6.05   5.12   4.24   3.21   2.25   1.31   0.40   2.97 
Weighted-average
  FICO (3)
  715   742   744   767   767   756   762   751   756   757 
Number of loans  39   6   14   64   81   117   140   118   77   656 
                                         
Geographic
  breakdown (%)
                                        
Inland Empire  39%  —%  2%  34%  16%  18%  10%  18%  11%  16%
Southern
  California (4)
  54%  74%  77%  45%  49%  60%  62%  64%  66%  60%
Other California (5)
  5%  26%  21%  21%  35%  22%  28%  18%  23%  24%
Other States  2%  —%  —%  —%  —%  —%  —%  —%  —%  —%
Total  100%  —%  100%  100%  100%  100%  100%  100%  100%  100%

(1)
LTV is the ratio derived by dividing the current loan balance by the lower of the original appraised value or purchase price of the real estate collateral.
(2)
Debt Coverage Ratio ("DCR") at time of origination.
(3)
At time of loan origination.
(4)
Other than the Inland Empire.
(5)
Other than the Inland Empire and Southern California.

The following table summarizes the interest rate reset or maturity schedule of the Corporation's multi-family loans held for investment, including the percentage of those which are identified as non-performing, 30 – 89 days delinquent or not fully amortizing as of September 30, 2018:
(Dollars In Thousands) Balance  
Non-
Performing (1) 
 
30 - 89 Days
Delinquent
  
Percentage
Not Fully
Amortizing (1) 
Interest rate reset or mature in the next 12 months $130,379   —%  —%  6%
Interest rate reset or mature between 1 year and 5 years  310,141   —%  —%  2%
Interest rate reset or mature after 5 years  14,301   —%  —%  —%
Total $454,821   —%  —%  3%

(1)
As a percentage of each category.

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The following table describes certain credit risk characteristics, geographic locations and the calendar year of loan origination of the Corporation's commercial real estate loans held for investment, at September 30, 2018:
  Calendar Year of Origination    
(Dollars In Thousands) 
2010 &
Prior
  

2011
  

2012
  

2013
  

2014
  

2015
  

2016
  

2017
  
YTD
2018
  
Total (5)(6)
 
Loan balance (in
  thousands)
 $607  $—  $9,923  $9,193  $20,082  $19,560  $16,102  $19,599  $16,960  $112,026 
Weighted-average
  LTV (1)
  35%  —%  44%  48%  44%  40%  48%  43%  44%  44%
Weighted-average
  DCR (2)
  1.38x  —x  1.97x  1.60x  1.94x  1.80x  1.57x  1.82x  1.63x  1.77x
Weighted-average
  age (in years)
  10.70   —   6.02   5.21   4.14   3.20   2.36   1.12   0.37   2.91 
Weighted-average
  FICO (2)
  712   —   741   763   753   757   758   773   751   758 
Number of loans  5   —   8   15   23   25   22   23   25   146 
                                         
Geographic
  breakdown (%):
                                        
Inland Empire  67%  —%  75%  23%  37%  31%  11%  26%  12%  29%
Southern
  California (3)
  33%  —%  25%  48%  43%  32%  65%  52%  47%  45%
Other California (4)
  —%  —%  —%  29%  20%  37%  24%  22%  41%  26%
Other States  —%  —%  —%  —%  —%  —%  —%  —%  —%  —%
Total  100%  —%  —%  100%  100%  100%  100%  100%  100%  100%

(1)
LTV is the ratio derived by dividing the current loan balance by the lower of the original appraised value or purchase price of the real estate collateral.
(2)
At time of loan origination.
(3)
Other than the Inland Empire.
(4)
Other than the Inland Empire and Southern California.
(5)
Comprised of the following: $49.5 million in Mixed Use; $17.2 million in Retail; $15.1 million in Office; $10.0 million in Mobile Home Parks; $8.0 million in Warehouse; $4.4 million in Medical/Dental Office; $2.7 million in Mini-Storage; $2.0 million in Restaurant/Fast Food; $1.6 million in Automotive – Non Gasoline and $1.5 million in Light Industrial/Manufacturing.
(6)
Consisting of $106.4 million or 95.0 percent in investment properties and $5.6 million or 5.0 percent in owner occupied properties.

The following table summarizes the interest rate reset or maturity schedule of the Corporation's commercial real estate loans held for investment, including the percentage of those which are identified as non-performing, 30 – 89 days delinquent or not fully amortizing as of September 30, 2018:
(Dollars In Thousands) Balance  
Non-
Performing (1) 
 
30 - 89 Days
Delinquent
  
Percentage
Not Fully
Amortizing (1) 
Interest rate reset or mature in the next 12 months $32,602   —%  —%  73%
Interest rate reset or mature between 1 year and 5 years  79,424   —%  —%  92%
Interest rate reset or mature after 5 years  —   —%  —%  —%
Total $112,026   —%  —%  86%

(1)
As a percentage of each category.

59
The following table sets forth information with respect to the Corporation'sCorporation’s non-performing assets, net of allowance for loan losses and fair value adjustments, at the dates indicated:
(In Thousands) At September 30,
2019		  At June 30,
2019		 
Loans on non-accrual status (excluding restructured loans):      
Mortgage loans:      
     Single-family $2,737  $3,315 
     Construction  1,139   971 
     Total  3,876   4,286 
         
Accruing loans past due 90 days or more  —   — 
         
Restructured loans on non-accrual status:        
Mortgage loans:        
     Single-family  1,316   1,891 
Commercial business loans  38   41 
     Total  1,354   1,932 
         
Total non-performing loans  5,230   6,218 
         
Real estate owned, net  —   — 
Total non-performing assets $5,230  $6,218 
         
Non-performing loans as a percentage of loans held for investment, net
   of allowance for loan losses
  0.57%  0.71%
         
Non-performing loans as a percentage of total assets  0.47%  0.57%
         
Non-performing assets as a percentage of total assets  0.47%  0.57%
(In Thousands) 
At September 30,
2018 
 
At June 30,
2018
 
Loans on non-accrual status (excluding restructured loans):      
Mortgage loans:      
     Single-family $2,773  $2,665 
     Construction  745   — 
     Total  3,518   2,665 
         
Accruing loans past due 90 days or more  —   — 
         
Restructured loans on non-accrual status:        
Mortgage loans:        
     Single-family  3,280   3,328 
Commercial business loans  64   64 
     Total  3,344   3,292 
         
Total non-performing loans  6,862   6,057 
         
Real estate owned, net  524   906 
Total non-performing assets $7,386  $6,963 
         
Non-performing loans as a percentage of loans held for investment, net
   of allowance for loan losses
  0.78%  0.67%
         
Non-performing loans as a percentage of total assets  0.59%  0.52%
         
Non-performing assets as a percentage of total assets  0.64%  0.59%

The following table describes the non-performing loans, net of allowance for loan losses and fair value adjustments, by the calendar year of origination as of September 30, 2018:
  Calendar Year of Origination    
(In Thousands) 
2010 &
Prior
  2011  2012  2013  2014  2015  2016   20147  
YTD
2018
  Total 
Mortgage loans:                               
Single-family $5,169  $—  $86  $—  $—  $—  $—  $798  $—  $6,053 
Construction  —   —   —   —   —   —   —   —   745   745 
Commercial business
  loans
  64   —   —   —   —   —   —   —   —   64 
Total $5,233  $—  $86  $—  $—  $—  $—  $798  $745  $6,862 
47
60
The following table describes the non-performing loans, net of allowance for loan losses and fair value adjustments, by the geographic location as of September 30, 2018:
(In Thousands) Inland Empire  
Southern
California (1)
  
Other
California (2)
  Other States  Total 
Mortgage loans:               
Single-family $2,301  $2,487  $1,265  $—  $6,053 
Construction  —   745   —   —   745 
Commercial business loans  64   —   —   —   64 
Total $2,365  $3,232  $1,265  $—  $6,862 

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

The following table summarizes classified assets, which is comprised of classified loans, net of allowance for loan losses and fair value adjustments, and real estate owned, if any, at the dates indicated:
 
At September 30,
2018
  
At June 30,
2018
  At September 30,
2019		  At June 30,
2019		 
(Dollars In Thousands) Balance  Count  Balance  Count  Balance  Count  Balance  Count 
Special mention loans:                        
Mortgage loans:                        
Single-family $1,141   5  $2,584   8  $3,039  8  $3,795  13 
Multi-family  3,927   3   3,947   3  3,842  3  3,864  3 
Commercial real estate  —   —   940   1  —  —  927  1 
Total special mention loans  5,068   8   7,471   12  6,881  11  8,586  17 
                            
Substandard loans:                            
Mortgage loans:                            
Single-family  7,478   25   7,391   24  4,053  19  6,631  23 
Commercial real estate 926  1  —  — 
Construction  745   1   —   —  1,139  1  971  1 
Commercial business loans  64   1   64   1   38   1   41   1 
Total substandard loans  8,287   27   7,455   25  6,156  22  7,643  25 
                                
Total classified loans  13,355   35   14,926   37  13,037  33  16,229  42 
                            
Real estate owned:                
Single-family  524   1   906   2 
Total real estate owned  524   1   906   2 
Real estate owned —  —  —  — 
                                
Total classified assets $13,879   36  $15,832   39  $13,037   33  $16,229   42 


61


48
Loan Volume Activities

The following table is provided to disclose details related to the volume of loans originated, purchased and sold for the quarters indicated:
  For the Quarters Ended
September 30,		 
(In Thousands) 2019  2018 
Loans originated for sale:      
     Retail originations $—  $127,133 
     Wholesale originations  —   69,188 
        Total loans originated for sale  —   196,321 
         
Loans sold:        
     Servicing released  —   (211,050)
     Servicing retained  —   (758)
        Total loans sold  —   (211,808)
         
Loans originated for investment:        
     Mortgage loans:        
           Single-family  7,506   17,216 
           Multi-family  19,350   12,709 
           Commercial real estate  2,419   5,305 
           Construction  896   1,480 
        Total loans originated for investment  30,171   36,710 
         
Loans purchased for investment:        
     Mortgage loans:        
           Single-family  26,123   — 
           Multi-family  37,126   — 
        Total loans purchased for investment  63,249   — 
         
Mortgage loan principal payments  (50,829)  (62,929)
Real estate acquired in settlement of loans  —   — 
Increase (decrease) in other items, net (1)
  1,798   (1,392)
         
Net increase (decrease) in loans held for investment and  loans held for sale at fair value $44,389  $(43,098)
  
For the Quarters Ended
September 30,
 
(In Thousands) 2018  2017 
Loans originated for sale:      
   Retail originations $127,133  $213,301 
   Wholesale originations  69,188   178,991 
        Total loans originated for sale (1)
  196,321   392,292 
         
Loans sold:        
   Servicing released  (211,050)  (373,463)
   Servicing retained  (758)  (7,588)
        Total loans sold (2)
  (211,808)  (381,051)
         
Loans originated for investment:        
   Mortgage loans:        
      Single-family  17,216   27,336 
      Multi-family  12,709   12,194 
      Commercial real estate  5,305   4,492 
      Construction  1,480   934 
   Consumer loans  —   1 
        Total loans originated for investment  (3)
  36,710   44,957 
         
Mortgage loan principal payments  (62,929)  (43,361)
Real estate acquired in settlement of loans  —   — 
(Decrease) increase in other items, net (4)
  (1,392)  990 
         
Net (decrease) increase in loans held for investment and loans held for sale at fair value $(43,098) $13,827 

(1)
Includes PBM loans originated for sale during the quarters ended September 30, 2018 and 2017 totaling $196.3 million and $392.3 million, respectively.
(2)
Includes PBM loans sold during the quarters ended September 30, 2018 and 2017 totaling $211.8 million and $381.1 million, respectively.
(3)
Includes PBM loans originated for investment during the quarters ended September 30, 2018 and 2017 totaling $15.9 million and $25.4 million, respectively.
(4)
Includes net changes in undisbursed loan funds, deferred loan fees or costs, allowance for loan losses, fair value of loans held for investment, fair value of loans held for sale, advance payments of escrows and repurchases.

Loans that the Corporation has originated for sale are primarily sold on a servicing released basis.  Clear ownership is conveyed to the investor by endorsing the original note in favor of the investor; transferring the servicing to a new servicer consistent with investor instructions; communicating the servicing transfer to the borrower as required by law; and sending the loan file and collateral instruments electronically to the investor contemporaneous with receiving the cash proceeds from the sale of the loan.  Additionally, the Corporation registers the change of ownership in the mortgage electronic registration system known as MERS as required by the contractual terms of the loan sale agreement.  Also, the Corporation retains an imaged copy of the entire loan file and collateral instruments as an abundance of caution in the event questions arise that can only be answered by reviewing the loan file.  Additionally, the Corporation does not originate or sponsor mortgage-backed securities.

62
Liquidity and Capital Resources

The Corporation'sCorporation’s primary sources of funds are deposits, proceeds from the sale of loans originated for sale, proceeds from principal and interest payments on loans, proceeds from the maturity and sale of investment securities, FHLB – San Francisco advances, access to the discount window facility at the Federal Reserve Bank of San Francisco and access to a federal funds facility with its correspondent bank.  While maturities and scheduled amortization of loans and investment securities are a relatively predictable source of funds, deposit flows, mortgage prepayments and loan sales are greatly influenced by general interest rates, economic conditions and competition.

49
The primary investing activity of the Corporation is the origination and purchase of loans held for investment and loans held for sale.investment.  During the first three months of fiscal 20192020 and 2018,2019, the Corporation originated $233.0and purchased loans for investment of $93.4 million and $437.2$36.7 million of loans, respectively. The total loans sold in the first three months of fiscal 2019 and 2018 were $211.8 million and $381.1 million, respectively.  At September 30, 2018,2019, the Corporation had loan origination commitments totaling $49.2$7.1 million, undisbursed lines of credit totaling $2.0$1.5 million and undisbursed construction loan funds totaling $5.1$6.2 million.  The Corporation anticipates that it will have sufficient funds available to meet its current loan commitments.

The Corporation'sCorporation’s primary financing activity is gathering deposits.  During the first three months of fiscal 2019,2020, the net decrease in deposits was $5.5$9.6 million or one percent, primarily due to non-renewing scheduled maturities in time deposits. The decrease in time deposits was consistent with the Corporation's operating strategy.savings accounts and non interest-bearing checking accounts. Time deposits decreased $5.0$1.9 million, or twoone percent, to $232.6$191.2 million at September 30, 20182019 from $237.6$193.1 million at June 30, 2018.2019.  At September 30, 2018,2019, time deposits with a principal amount of $250,000 or less and scheduled to mature in one year or less were $124.0$77.8 million and total time deposits with a principal amount of $100,000more than $250,000 and scheduled to mature in one year or higherless were $120.7$24.0 million. Historically, the Corporation has been able to retain a significant percentage of its time deposits as they mature.

The Corporation must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities.  The Corporation generally maintains sufficient cash and cash equivalents to meet short-term liquidity needs.  At September 30, 2018,2019, total cash and cash equivalents were $78.9$54.5 million, or sevenfive percent of total assets.  Depending on market conditions and the pricing of deposit products and FHLB – San Francisco advances, the Bank may rely on FHLB – San Francisco advances for part of its liquidity needs.  As of September 30, 2018,2019, total borrowings were $111.1$131.1 million and the financing availability at FHLB – San Francisco was limited to 35 percent of total assets; the remaining borrowing facility available was $289.8$233.1 million and the remaining available collateral was $510.0$419.1 million. In addition, the Bank has secured a $59.9$63.1 million discount window facility at the Federal Reserve Bank of San Francisco, collateralized by investment securities with a fair market value of $63.7$67.1 million. As of September 30, 2018,2019, the Bank also has a borrowing arrangement in the form of a federal funds facility with its correspondent bank for $17.0 million that matures on June 30, 20192020 which the Bank intends to renew upon maturity.  The Bank had no advances under its correspondent bank or discount window facility as of September 30, 2018.2019.

Regulations require thrifts to maintain adequate liquidity to assure safe and sound operations. The Bank'sBank’s average liquidity ratio (defined as the ratio of average qualifying liquid assets to average deposits and borrowings) for the quarter ended September 30, 2018 increased2019 decreased to 16.615.7 percent from 14.920.7 percent for the quarter ended June 30, 2018.2019.

The Bank, as a federally-chartered, federally insured savings bank, is subject to the capital requirements established by the OCC. Under the OCC's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. In addition, Provident Financial Holdings, Inc. as a savings and loan holding company registered with the FRB and is required by the FRB to maintain capital adequacy that generally parallels the OCC requirements.

63
At September 30, 2018, Provident Financial Holdings, Inc. and2019, the Bank each exceeded all regulatory capital requirements.  The Bank was categorized "well-capitalized" at September 30, 20182019 under the regulations of the OCC.

As a bank holding company registered with the Federal Reserve, Provident Financial Holdings, Inc. is subject to the capital adequacy requirements of the Federal Reserve. For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis, and the Federal Reserve expects the holding company’s subsidiary bank to be well capitalized under the prompt corrective action regulations.

50
The Bank's actual and required minimum capital amounts and ratios at the dates indicated are as follows (dollars in thousands):
    Regulatory Requirements     Regulatory Requirements 
 Actual  
Minimum for Capital
Adequacy Purposes
  
Minimum to Be
Well Capitalized
  Actual  
Minimum for Capital
Adequacy Purposes (1)
  
Minimum to Be
Well Capitalized
 
 Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio 
                                    
Provident Financial Holdings, Inc.:                  
                  
As of September 30, 2018                  
Tier 1 leverage capital (to adjusted average assets) $121,466   10.44% $46,561   4.00% $58,201   5.00%
Common Equity Tier 1 ("CET1") capital (to risk-
weighted assets)
 $121,466   18.09% $42,803   6.38% $43,642   6.50%
Tier 1 capital (to risk-weighted assets) $121,466   18.09% $52,875   7.88% $53,714   8.00%
Total capital (to risk-weighted assets) $128,770   19.18% $66,303   9.88% $67,142   10.00%
                        
As of June 30, 2018                        
Tier 1 leverage capital (to adjusted assets) $120,218   10.29% $46,719   4.00% $58,399   5.00%
CET1 capital (to risk-weighted assets) $120,218   17.37% $44,132   6.38% $44,998   6.50%
Tier 1 capital (to risk-weighted assets) $120,218   17.37% $54,516   7.88% $55,382   8.00%
Total capital (to risk-weighted assets) $127,760   18.46% $68,362   9.88% $69,227   10.00%
                        
Provident Savings Bank, F.S.B.:                                          
                                          
As of September 30, 2018                        
As of September 30, 2019                  
Tier 1 leverage capital (to adjusted average assets) $111,602   9.59% $46,558   4.00% $58,197   5.00% $110,550  10.21%
 $43,324    4.00%
 $54,155    5.00%
CET1 capital (to risk-weighted assets) $111,602   16.62% $42,802   6.38% $43,641   6.50% $110,550  16.32%
 $47,409    7.00%
 $44,023    6.50%
Tier 1 capital (to risk-weighted assets) $111,602   16.62% $52,873   7.88% $53,712   8.00% $110,550  16.32%
 $57,568    8.50%
 $54,182    8.00%
Total capital (to risk-weighted assets) $118,906   17.71% $66,300   9.88% $67,140   10.00% $117,622  17.37%
 $71,114  10.50%
 $67,727  10.00%
                                          
As of June 30, 2018                        
Tier 1 leverage capital (to adjusted assets) $116,369   9.96% $46,716   4.00% $58,394   5.00%
As of June 30, 2019                  
Tier 1 leverage capital (to adjusted average assets) $115,009  10.50%
 $43,824    4.00%
 $54,779    5.00%
CET1 capital (to risk-weighted assets) $116,369   16.81% $44,125   6.38% $44,990   6.50% $115,009  18.00%
 $44,730    7.00%
 $41,535    6.50%
Tier 1 capital (to risk-weighted assets) $116,369   16.81% $54,507   7.88% $55,372   8.00% $115,009  18.00%
 $54,314    8.50%
 $51,119    8.00%
Total capital (to risk-weighted assets) $123,911   17.90% $68,350   9.88% $69,215   10.00% $122,225   19.13%
 $67,094   10.50%
 $63,899   10.00%

(1)
The dollar amounts and ratios include the capital conservation buffer of greater than 2.50% of risk-weighted assets at September 30, 2019 and June 30, 2019 for CET1 capital, Tier 1 capital and Total capital.

In addition to the minimum CET1, Tier 1 and total capital ratios, Provident Financial Holdings, Inc. and the Bank will haveis required to maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This requirement began to be phased in on January 1, 2016 at an amount more than 0.625 percent of risk-weighted assets and will increase each year to an amount more than to 2.5 percent of risk-weighted assets when fully implemented in January 2019. As ofAt September 30, 2018,2019, the conservation bufferBank was an amount more than 1.875%.in compliance with this requirement.

The ability of the Corporation to pay dividends to stockholders depends primarily on the ability of the Bank to pay dividends to the Corporation.  The Bank may not declare or pay a cash dividend if the effect thereof would cause its net worth to be reduced
64
below the regulatory capital requirements imposed by federal regulation.  In the first three months of fiscal 2019,2020, the Bank paid a cash dividend of $7.5 million to the Corporation; while the Corporation paid $1.0 million of cash dividends to its shareholders.


Supplemental Information
  At
September 30,
2019		  At
June 30,
2019		  At
September 30,
2018		 
          
Loans serviced for others (in thousands) 
$110,494  
$120,236  
$124,802 
             
Book value per share 
$16.33  
$16.12  
$16.22 
 
At
September 30,
2018 
 
At
June 30,
2018
 
 At
September 30,
2017
          
Loans serviced for others (in thousands) $124,802  $128,409  $122,585 
             
Book value per share $16.22  $16.23  $16.42 

51


ITEM 3 – Quantitative and Qualitative Disclosures about Market Risk.

One of the Corporation'sCorporation’s principal financial objectives is to achieve long-term profitability while reducing its exposure to fluctuating interest rates.  The Corporation has sought to reduce the exposure of its earnings to changes in interest rates by attempting to manage the repricing mismatch between interest-earning assets and interest-bearing liabilities.  The principal element in achieving this objective is to increase the interest-rate sensitivity of the Corporation'sCorporation’s interest-earning assets by retaining for its portfolio new loan originations with interest rates subject to periodic adjustment to market conditions and by selling fixed-rate, single-family mortgage loans.conditions.  In addition, the Corporation maintains an investment portfolio, which is largely in U.S. government agency MBS and U.S. government sponsored enterprise MBS with contractual maturities of up to 30 years that reprice frequently or have a relatively short-average life.  The Corporation relies on retail deposits as its primary source of funds while utilizing FHLB – San Francisco advances as a secondary source of funding.  Management believes retail deposits, unlike brokered deposits, reduces the effects of interest rate fluctuations because they generally represent a more stable source of funds.  As part of its interest rate risk management strategy, the Corporation promotes transaction accounts and time deposits with terms up to seven years.

Through the use of an internal interest rate risk model, the Corporation is able to analyze its interest rate risk exposure by measuring the change in net portfolio value ("NPV"(“NPV”) over a variety of interest rate scenarios.  NPV is defined as the net present value of expected future cash flows from assets, liabilities and off-balance sheet contracts.  The calculation is intended to illustrate the change in NPV that would occur in the event of an immediate change in interest rates of -200, -100, +100, +200 +300 and +400+300 basis points ("bp"(“bp”) with no effect given to steps that management might take to counter the effect of the interest rate movement. The currentAs of November 8, 2019, the targeted federal funds rate is 2.25 percentwas 1.50% to 1.75%, making an immediate change of -200 and -300 basis points improbable.
65

The following table is derived from the internal interest rate risk model and represents the NPV based on the indicated changes in interest rates as of September 30, 20182019 (dollars in thousands).
Basis Points ("bp")
Change in Rates
  
Net
Portfolio
Value
  
NPV
Change(1)
  
Portfolio
Value of
Assets
  
NPV as Percentage
of Portfolio Value
Assets(2)
  
Sensitivity
Measure(3)
 
 +400bp $246,333  $130,529  $1,264,568   19.48%  +950bp
 +300bp $220,367  $104,563  $1,244,727   17.70%  +772bp
 +200bp $189,759  $73,955  $1,220,472   15.55%  +557bp
 +100bp $154,461  $38,657  $1,191,968   12.96%  +298bp
 0bp $115,804  $—  $1,160,133   9.98%  0bp
 -100bp $108,425  $(7,379) $1,151,642   9.41%  -57bp
Basis Points ("bp")
Change in Rates
Net
Portfolio
Value
NPV
Change (1)
Portfolio
Value of
Assets
NPV as Percentage
of Portfolio Value
Assets (2)
Sensitivity
Measure (3)
+300 bp$ 219,311 $        94,784 $ 1,198,136 18.30%    +721 bp
+200 bp$ 192,202 $          67,675 $ 1,177,269 16.33%   +524 bp
+100 bp$ 161,007 $          36,480 $ 1,152,528 13.97%   +288 bp
      0 bp$ 124,527 $— $ 1,122,720 11.09%         0 bp
-100 bp$ 112,731 $(11,796)$ 1,115,819 10.10%      -99 bp
-200 bp$ 115,937 $(8,590)$ 1,119,953 10.35%        -74 bp

(1)
Represents the increase (decrease) of the NPV at the indicated interest rate change in comparison to the NPV at September 30, 2018 ("2019 (“base case"case”).
(2)
Derived from the NPV divided by the portfolio value of total assets.
(3)
Derived from the change in the NPV ratio from the base case amount assuming the indicated change in interest rates (expressed in basis points).

The following table is derived from the internal interest rate risk model and represents the change in the NPV at a -100 basis point rate shock at September 30, 20182019 and June 30, 2018.2019.
 At September 30, 2019At June 30, 2019
 (-100 bp rate shock)(-100 bp rate shock)
Pre-Shock NPV Ratio: NPV as a % of PV Assets             11.09%11.80%
Post-Shock NPV Ratio: NPV as a % of PV Assets             10.10%10.67%
Sensitivity Measure: Change in NPV Ratio            -99 bp-113 bp

 At September 30, 2018At June 30, 2018
 (-100 bp rate shock)(-100 bp rate shock)
Pre-Shock NPV Ratio: NPV as a % of PV Assets9.98%10.24%
Post-Shock NPV Ratio: NPV as a % of PV Assets9.41%9.62%
Sensitivity Measure: Change in NPV Ratio-57 bp-62 bp
52

The pre-shock NPV ratio declined 26decreased 71 basis points to 9.9811.09 percent at September 30, 20182019 from 10.2411.80 percent at June 30, 20182019 and the post-shock NPV ratio declined 21decreased 57 basis points to 9.4110.10 percent at September 30, 20182019 from 9.6210.67 percent at June 30, 2018.2019.  The declinedecrease of the NPV ratios was primarily attributable to a $7.5 million cash dividend distribution from the Bank to the CorporationProvident Financial Holdings, Inc. in September 2018,2019, partly offset by net income in the first three months of fiscal 2019.2020 and a higher net valuation of total assets in comparison to total liabilities.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing tables.  For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates.  Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates.  Additionally, certain assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset.  Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from time deposits could likely deviate significantly from those assumed when calculating the results described in the tables above.  It is also possible that, as a result of an interest rate increase, the higher mortgage payments required from ARM borrowers could result in an increase in delinquencies and defaults.  Changes in market interest rates may also affect the volume and profitability of the Corporation's mortgage banking operations.  Accordingly, the data presented in the tables in this section should not be relied upon as indicative of actual results in the event of changes in interest rates.  Furthermore, the NPV presented in the foregoing tables is not intended to present the fair market value of the Corporation, nor does it represent amounts that would be available for distribution to shareholders in the event of the liquidation of the Corporation.

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The Corporation measures and evaluates the potential effects of interest rate movements through an interest rate sensitivity "gap" analysis.  Interest rate sensitivity reflects the potential effect on net interest income when there is movement in interest rates. For loans, securities and liabilities with contractual maturities, the table presents contractual repricing or scheduled maturity.  For transaction accounts (checking, money market and savings deposits) that have no contractual maturity, the table presents estimated principal cash flows and, as applicable, the Corporation's historical experience, management's judgment and statistical analysis as applicable, concerning their most likely withdrawal behaviors.



53
The following table represents the interest rate gap analysis of the Corporation's assets and liabilities as of September 30, 2018:2019:

  
Term to Contractual Repricing, Estimated Repricing, or Contractual
Maturity(1)
 
  As of September 30, 2018 
  12 months or less  Greater than 1 year to 3 years  Greater than 3 years to 5 years  Greater than 5 years or non-sensitive  Total 
  (Dollars In thousands) 
Repricing Assets:               
Cash and cash equivalents $73,231  $—  $—  $5,697  $78,928 
Investment securities  42,954   —   —   43,690   86,644 
Loans held for investment  281,554   233,424   277,266   84,847   877,091 
Loans held for sale  78,794   —   —   —   78,794 
FHLB - San Francisco stock  8,199   —   —   —   8,199 
Other assets  —   —   —   27,824   27,824 
Total assets  484,732   233,424   277,266   162,058   1,157,480 
                     
Repricing Liabilities and Equity:                    
Checking deposits - non-interest bearing  —   —   —   87,250   87,250 
Checking deposits - interest bearing  39,194   78,389   78,389   65,323   261,295 
Savings deposits  56,941   113,882   113,882   —   284,705 
Money market deposits  18,107   18,106   —   —   36,213 
Time deposits  124,007   83,514   23,770   1,358   232,649 
Borrowings  10,000   31,149   30,000   40,000   111,149 
Other liabilities  —   —   —   22,539   22,539 
Stockholders' equity  —   —   —   121,680   121,680 
Total liabilities and stockholders' equity  248,249   325,040   246,041   338,150   1,157,480 
                     
Repricing gap positive (negative) $236,483  $(91,616) $31,225  $(176,092) $— 
Cumulative repricing gap:                    
Dollar amount $236,483  $144,867  $176,092  $—  $— 
Percent of total assets  20%  13%  15%  —%  —%

    
Term to Contractual Repricing, Estimated Repricing, or Contractual
Maturity (1)
 
    As of September 30, 2019 
(Dollars In Thousands) 
12 months or
less
  
Greater than
1 year to 3
years
  
Greater than
3 years to 5
years
  
Greater than
5 years or
non-sensitive
  Total 
    
Repricing Assets:               
Cash and cash equivalents $47,691  $—  $—  $6,824  $54,515 
Investment securities  29,286   —   —   61,319   90,605 
Loans held for investment  265,573   251,921   311,871   94,949   924,314 
FHLB - San Francisco stock  8,199   —   —   —   8,199 
Other assets  3,380   —   —   24,283   27,663 
Total assets  354,129   251,921   311,871   187,375   1,105,296 
                     
Repricing Liabilities and Equity:                    
Checking deposits - non-interest bearing  —   —   —   85,338   85,338 
Checking deposits - interest bearing  39,510   79,020   79,020   65,850   263,400 
Savings deposits  51,376   102,752   102,752   —   256,880 
Money market deposits  17,480   17,479   —   —   34,959 
Time deposits  101,870   64,519   23,914   856   191,159 
Borrowings  —   71,092   40,000   20,000   131,092 
Other liabilities  366   —   —   19,933   20,299 
Stockholders' equity  —   —   —   122,169   122,169 
Total liabilities and stockholders' equity  210,602   334,862   245,686   314,146   1,105,296 
                     
Repricing gap positive (negative) $143,527  $(82,941) $66,185  $(126,771) $— 
Cumulative repricing gap:                    
Dollar amount $143,527  $60,586  $126,771  $—  $— 
Percent of total assets  13%  5%  11%  —%  —%
(1)  Cash and cash equivalents are presented as estimated repricing; investment securities and loans held for investment are presented as contractual maturities or contractual repricing (without consideration for prepayments); loans held for sale and transaction accounts are presented as estimated repricing; FHLB - San Francisco stock is presented as contractual repricing; transaction accounts (checking, savings and money market deposits) are presented as estimated repricing; while time deposits (without consideration for early withdrawals) and borrowings are presented as contractual maturities.

The static gap analysis shows a positive position in the "Cumulative repricing gap - dollar amount" category, indicating more assets are sensitive to
67
repricing than liabilities. Management views non-interest bearing deposits to be the least sensitive to changes in market interest rates and these accounts are therefore characterized as long-term funding. Interest-bearing checking deposits are considered more sensitive, followed by increased sensitivity for savings and money market deposits. For the purpose of calculating gap, a portion of these interest-bearing deposit balances are assumed to be subject to estimated repricing as follows: interest-bearing checking deposits at 15% per year, savings deposits at 20% per year and money market deposits at 50% in the first and second years..years.

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The gap results presented above could vary substantially if different assumptions are used or if actual experience differs from the assumptions used in the preparation of the gap analysis.  Furthermore, the gap analysis provides a static view of interest rate risk exposure at a specific point in time without taking into account redirection of cash flows activity and deposit fluctuations, and repricing.fluctuations.

The extent to which the net interest margin will be impacted by changes in prevailing interest rates will depend on a number of factors, including how quickly interest-earning assets and interest-bearing liabilities react to interest rate changes. It is not uncommon for rates on certain assets or liabilities to lag behind changes in the market rates of interest.  Additionally, prepayments of loans and early withdrawals of certificates of deposit could cause interest sensitivities to vary.  As a result, the relationship between interest-earning assets and interest-bearing liabilities, as shown in the previous table, is only a general indicator of interest rate sensitivity and the effect of changing rates of interest on net interest income is likely to be different from that predicted solely on the basis of the interest rate sensitivity analysis set forth in the previous table.

The Corporation also models the sensitivity of net interest income for the 12-month period subsequent to any given month-end assuming a dynamic balance sheet accounting for, among other items:

The Corporation'sCorporation’s current balance sheet and repricing characteristics;
Forecasted balance sheet growth consistent with the business plan;
Current interest rates and yield curves and management estimates of projected interest rates;
Embedded options, interest rate floors, periodic caps and lifetime caps;
Repricing characteristics for market rate sensitive instruments;
Loan, investment, deposit and borrowing cash flows;
Loan prepayment estimates for each type of loan; and
Immediate, permanent and parallel movements in interest rates of plus 400, 300, 200 and 100 and minus 100 and 200 basis points.  

The following table describes the results of the analysis at September 30, 20182019 and June 30, 2018.2019.
At September 30, 2018 At June 30, 2018
At September 30, 2019At September 30, 2019 At June 30, 2019
Basis Point (bp)
Change in Rates
Change in
Net Interest Income
 
Basis Point (bp)
Change in Rates
Change in
Net Interest Income
Change in
Net Interest Income
 
Basis Point (bp)
Change in Rates
Change in
Net Interest Income
+400 bp10.25% +400 bp7.84%
+300 bp8.58% +300 bp6.83%5.08% +300 bp6.85%
+200 bp6.79% +200 bp5.73%2.88% +200 bp4.39%
+100 bp4.83% +100 bp4.53%1.50% +100 bp2.36%
-100 bp(5.79)% -100 bp(3.98)%(3.36)% -100 bp(3.63)%
-200 bp(6.32)% -200 bp(6.69)%

At September 30, 20182019 and June 30, 2018,2019, the Corporation was asset sensitive as its interest-earning assets at those dates are expected to reprice more quickly than its interest-bearing liabilities during the subsequent 12-month period.  Therefore, in a rising interest rate environment, the model projects an increase in net interest income over the subsequent 12-month period.  In a falling interest rate environment, the results project a decrease in net interest income over the subsequent 12-month period.

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Management believes that the assumptions used to complete the analysis described in the table above are reasonable.  However, past experience has shown that immediate, permanent and parallel movements in interest rates will not necessarily occur.  Additionally, while the analysis provides a tool to evaluate the projected net interest income to changes in interest rates, actual results may be substantially different if actual experience differs from the assumptions used to complete the analysis, particularly with respect to the 12-month business plan when asset growth is forecast.  Therefore, the model results that the Corporation discloses should be thought of as a risk management tool to compare the trends of the Corporation'sCorporation’s current disclosure to previous disclosures, over time, within the context of the actual performance of the treasury yield curve.

55
ITEM 4 – Controls and Procedures.

a) An evaluation of the Corporation'sCorporation’s disclosure controls and procedures (as defined in Section 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934 (the "Act"“Act”)) was carried out under the supervision and with the participation of the Corporation'sCorporation’s Chief Executive Officer, Chief Financial Officer and the Corporation'sCorporation’s Disclosure Committee as of the end of the period covered by this quarterly report.  In designing and evaluating the Corporation'sCorporation’s disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.  Also, because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been detected.  Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Based on their evaluation, the Corporation'sCorporation’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation'sCorporation’s disclosure controls and procedures as of September 30, 20182019 are effective, at the reasonable assurance level, in ensuring that the information required to be disclosed by the Corporation in the reports it files or submits under the Act is (i) accumulated and communicated to the Corporation'sCorporation’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC'sSEC’s rules and forms.

b) There have been no changes in the Corporation'sCorporation’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended September 30, 2018,2019, that has materially affected, or is reasonably likely to materially affect, the Corporation'sCorporation’s internal control over financial reporting.  The Corporation does not expect that its internal control over financial reporting will prevent all error and all fraud.  A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met.  Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any control procedure is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

69

PART II – OTHER INFORMATION

Item 1.  Legal Proceedings.

There have been no material changes in the legal proceedings previously disclosed in Part I, Item 3 of the Corporation'sCorporation’s Annual Report on Form 10-K for the year ended June 30, 2018. The class notice process has been completed2019, except as follows.

On July 24, 2019, the California Superior Court for the lawsuits filedCounty of San Bernardino, California granted final approval of the settlement in the Cannon vs. Bank lawsuit. On July 26, 2019, the final order was signed by plaintiff's McKeen-Chaplinthis court and Neal againston August 6, 2019, the Bank andforwarded the final approval hearing is set for November 13, 2018.settlement amount to the class administrator. The Corporation expectstotal settlement was reduced to $2.5 million from $2.8 million, resulting in a $296,000 settlement expense recovery which was recognized in the motion for final approval to be filed shortly. The long-form settlement agreement has been executed by all parties for the lawsuit known as Cannon against the Bank but remains subject to court approval. A hearing date has not been set by the court regarding this matter.first quarter of fiscal 2020.

56
Item 1A.  Risk Factors.

There have been no material changes in the risk factors previously disclosed in Part I, Item 1A of the Corporation's Annual Report on Form 10-K for the year ended June 30, 2018.2019.


Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

The table below represents the Corporation'sCorporation’s purchases of its equity securities for the first quarter of fiscal 2019.2020.
Period 
(a) Total
Number of
Shares Purchased
  
(b) Average
Price Paid
per Share
  
(c) Total Number of
Shares Purchased as
Part of Publicly
Announced Plan
  
(d) Maximum
Number of Shares
that May Yet Be
Purchased Under the
Plan (1)
 
July 1 – 31, 2018  —  $—   —   373,000 
August 1 – 31, 2018  —  $—   —   373,000 
September 1 – 30, 2018  20,566  $18.31   —   373,000 
Total  20,566  $18.31   —   373,000 
Period 
(a) Total
Number of
Shares Purchased
  
(b) Average
Price Paid
per Share
  
(c) Total Number of
Shares Purchased as
Part of Publicly
Announced Plan
  
(d) Maximum
Number of Shares
that May Yet Be
Purchased Under the
Plan (1)
 
July 1 – 31, 2019  —  $—   —   321,001 
August 1 – 31, 2019  14,624  $20.46   14,624   306,377 
September 1 – 30, 2019  2,300  $20.09   2,300   304,077 
Total  16,924  $20.41   16,924   304,077 

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

During the quarter ended September 30, 2019, the Corporation purchased 16,924 shares of the Corporation’s common stock at an average cost of $20.41 per share. As of September 30, 2018, no2019, a total of 68,923 shares or 18 percent of the shares authorized in the April 2018 stock repurchase plan have been purchased at an average cost of $19.91 per share, leaving all 373,000304,077 shares available for future purchases. During the quarter ended September 30, 2018, the Corporation issued 100,0002019, a total of 10,500 shares of common stock consistent with the vestingwere exercised and a total of previously awarded8,000 shares of restricted stock and the exercisewere forfeited, while no shares of certainrestricted common stock options.vested. The Company purchased 20,566Corporation did not purchase any shares at an average price of $18.31 per share from recipients to fund their withholding tax obligations in the first quarter of fiscal 2019.2020. During the quarter ended September 30, 2018,2019, the Corporation did not sell any securities that were not registered under the Securities Act of 1933.

The Corporation is subject to regulatory capital requirements adopted by the Federal Reserve Board, which generally are the same as the capital requirements for the Bank.  These capital requirements include provisions that limit the ability of the Corporation to pay dividends to its stockholders or repurchase its shares.

Item 3.  Defaults Upon Senior Securities.

Not applicable.

70

Item 4.  Mine Safety Disclosures.

Not applicable.


Item 5.  Other Information.

Not applicable.


57
Item 6.  Exhibits.

Exhibits:
3.1 (a)
Amended and Restated Certificate of Incorporation of Provident Financial Holdings, Inc. as filed with the Delaware Secretary of State on November 24, 2009 (incorporated by reference to Exhibit 3.1 to the Corporation's Quarterly Report on Form 10-Q filed on November 9, 2010)
  
3.1 (b)
Amended and Restated Bylaws of Provident Financial Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Corporation'sCorporation’s Current Report on Form 8-K filed on December 1, 2014)
  
10.1
4.1
Employment Agreement with Craig G. BlundenForm of Certificate of Provident's Common Stock (incorporated by reference to Exhibit 10.1 to the Corporation's Form 8-K dated December 19, 2005)
10.2
Post-Retirement Compensation Agreement with Craig G. Blunden (incorporated by reference to Exhibit 10.2 to the Corporation's Form 8-K dated December 19, 2005)
10.3
Post-Retirement Compensation Agreement with Donavon P. Ternes (incorporated by reference to Exhibit 10.1 to the Corporation's Form 8-K dated July 7, 2009)
10.4
Form of Severance Agreement with  Deborah L. Hill, Robert "Scott" Ritter, Lilian Salter, Donavon P. Ternes, David S. Weiant and Gwendolyn L. Wertz (incorporated by reference to Exhibit 10.1 in the Corporation's Form 8-K dated February 24, 2012)
10.5
2006 Equity Incentive Plan (incorporated by reference to Exhibit A to the Corporation's proxy statement dated October 12, 2006)
10.6
Form of Incentive Stock Option Agreement for options granted under the 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.10 in the Corporation's Form 10-Q for the quarter ended December 31, 2006)
10.7
Form of Non-Qualified Stock Option Agreement for options granted under the 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.11 in the Corporation's Form 10-Q for the quarter ended December 31, 2006)
10.8
Form of Restricted Stock Agreement for restricted shares awarded under the 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.12 in the Corporation's Form 10-Q for the quarter ended December 31, 2006)
71
10.9
2010 Equity Incentive Plan (incorporated by reference to Exhibit A to the Corporation's proxy statement dated October 28, 2010)
10.10
Form of Incentive Stock Option Agreement for options granted under the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 in the Corporation's Form 8-K dated November 30, 2010)
10.11
Form of Non-Qualified Stock Option Agreement for options granted under the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 in the Corporation's Form 8-K dated November 30, 2010)
10.12
Form of Restricted Stock Agreement for restricted shares awarded under the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 in the Corporation's Form 8-K dated November 30, 2010)
10.13
2013 Equity Incentive Plan (incorporated by reference to Exhibit A to the Corporation's proxy statement dated October 24, 2013)
10.14
Form of Incentive Stock Option Agreement for options granted under the 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 in the Corporation'sCorporation’s Registration Statement on Form S-8 (333-192727) dated December 9, 2013)
10.15
Form of Non-Qualified Stock Option Agreement for options granted under the 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 in the Corporation's Registration StatementS-1 (333-2230) filed on Form S-8 (333-192727) dated December 9, 2013)
10.16
Form of Restricted Stock Agreement for restricted shares awarded under the 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 in the Corporation's Registration Statement on Form S-8 (333-192727) dated December 9, 2013)
March 11, 1996))
  
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  
32.1
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  
32.2
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  
101The following materials from the Corporation'sCorporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018,2019, formatted in Extensible Business Reporting Language (XBRL): (1) Condensed Consolidated Statements of Financial Condition; (2) Condensed Consolidated Statements of Operations; (3) Condensed Consolidated Statements of Comprehensive Income; (4) Condensed Consolidated Statements of Stockholders'Stockholders’ Equity; (5) Condensed Consolidated Statements of Cash Flows; and (6) Selected Notes to Condensed Consolidated Financial Statements.
  




58
72


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 Provident Financial Holdings, Inc.
  
  
  
Date: November 8, 20182019
/s/ Craig G. Blunden
 Craig G. Blunden
 
Chairman and Chief Executive Officer
(Principal Executive Officer)
  
  
  
Date: November 8, 20182019
/s/ Donavon P. Ternes
 Donavon P. Ternes
 
President, Chief Operating Officer and
Chief Financial Officer
(Principal Financial and Accounting Officer)



73

59
Exhibit Index

31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  
32.1
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  
32.2
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  
101
The following materials from the Corporation'sCorporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018,2019, formatted in Extensible Business Reporting Language (XBRL): (1) Condensed Consolidated Statements of Financial Condition; (2) Condensed Consolidated Statements of Operations; (3) Condensed Consolidated Statements of Comprehensive Income; (4) Condensed Consolidated Statements of Stockholders'Stockholders’ Equity; (5) Condensed Consolidated Statements of Cash Flows; and (6) Selected Notes to Condensed Consolidated Financial Statements.