10-Q 1 prov10q123120.htm FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
[ X ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
 
For the quarterly period ended
December 31, 2020
 
[     ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the transition period from ________________ to _________________

Commission File Number 000-28304

PROVIDENT FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
      33-0704889    
(State or other jurisdiction of
 
(I.R.S.  Employer
incorporation or organization)
 
Identification No.)

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

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

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

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

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

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

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

Large accelerated filer [  ]                                                                           Accelerated filer [  ]   
Non-accelerated filer [X]                                                                            Smaller reporting company[X]                    
                                                                                                                       Emerging growth company [  ]

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of January 31, 2021 there were 7,442,254 shares of the registrant's common stock, $0.01 par value per share, outstanding.



PROVIDENT FINANCIAL HOLDINGS, INC.
Table of Contents
PART 1  -
FINANCIAL INFORMATION
Page
       
ITEM 1  -
Financial Statements.  The Unaudited Interim Condensed Consolidated Financial Statements of Provident Financial Holdings, Inc. filed as a part of the report are as follows:
 
       
 
Condensed Consolidated Statements of Financial Condition
 
   
as of December 31, 2020 and June 30, 2020
1
 
Condensed Consolidated Statements of Operations
 
   
for the Quarter and Six Months Ended December 31, 2020 and 2019
2
 
Condensed Consolidated Statements of Comprehensive Income
 
   
for the Quarter and Six Months Ended December 31, 2020 and 2019
3
 
Condensed Consolidated Statements of Stockholders’ Equity
 
   
for the Quarter and Six Months Ended December 31, 2020 and 2019
4
 
Condensed Consolidated Statements of Cash Flows
 
   
for the Six Months Ended December 31, 2020 and 2019
6
 
Notes to Unaudited Interim Condensed Consolidated Financial Statements
7
       
ITEM 2  -
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
 
       
 
General
40
 
Safe-Harbor Statement
41
 
Critical Accounting Policies
42
 
Executive Summary and Operating Strategy
43
 
Off-Balance Sheet Financing Arrangements
46
 
Comparison of Financial Condition at December 31, 2020 and June 30, 2020
46
 
Comparison of Operating Results
for the Quarter and Six Months ended December 31, 2020 and 2019
48
 
Asset Quality
58
 
Loan Volume Activities
62
 
Liquidity and Capital Resources
62
 
Supplemental Information
64
       
ITEM 3  -
Quantitative and Qualitative Disclosures about Market Risk
65
       
ITEM 4  -
Controls and Procedures
69
       
PART II  -
OTHER INFORMATION
 
       
ITEM 1  -
Legal Proceedings
69
ITEM 1A -
Risk Factors
70
ITEM 2  -
Unregistered Sales of Equity Securities and Use of Proceeds
70
ITEM 3  -
Defaults Upon Senior Securities
70
ITEM 4  -
Mine Safety Disclosures
70
ITEM 5  -
Other Information
71
ITEM 6  -
Exhibits
71
       
SIGNATURES
72



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

 
December 31,
 2020
June 30,
 2020
Assets
   
    Cash and cash equivalents
$
74,001
 
$
116,034
 
    Investment securities – held to maturity, at cost
203,098
 
118,627
 
    Investment securities – available for sale, at fair value
4,158
 
4,717
 
    Loans held for investment, net of allowance for loan losses of
    $8,538 and $8,265, respectively; includes $1,972 and $2,258 at fair value, respectively
855,086
 
902,796
 
    Accrued interest receivable
3,126
 
3,271
 
    Federal Home Loan Bank (“FHLB”) – San Francisco stock
7,970
 
7,970
 
    Premises and equipment, net
9,980
 
10,254
 
    Prepaid expenses and other assets
13,308
 
13,168
 
   
   
            Total assets
$
1,170,727
 
$
 1,176,837
 
     
Liabilities and Stockholders’ Equity
   
     
Liabilities:
   
    Non interest-bearing deposits
$
109,609
 
$
118,771
 
    Interest-bearing deposits
800,359
 
774,198
 
            Total deposits
909,968
 
892,969
 
     
    Borrowings
116,015
 
141,047
 
    Accounts payable, accrued interest and other liabilities
19,760
 
18,845
 
            Total liabilities
1,045,743
 
1,052,861
 
     
Commitments and Contingencies  (Notes 6 and 10)
   
     
Stockholders’ equity:
   
    Preferred stock, $.01 par value (2,000,000 shares authorized;
    none issued and outstanding)
 
 
    Common stock, $.01 par value (40,000,000 shares authorized;
    18,097,615 and 18,097,615 shares issued; 7,442,254 and
    7,436,315 shares outstanding, respectively)
181
 
181
 
    Additional paid-in capital
96,164
 
95,593
 
    Retained earnings
194,923
 
194,345
 
    Treasury stock at cost (10,655,361 and 10,661,300 shares, respectively)
(166,364
)
(166,247
)
    Accumulated other comprehensive income, net of tax
80
 
104
 
     
            Total stockholders’ equity
124,984
 
123,976
 
     
            Total liabilities and stockholders’ equity
$
1,170,727
 
$
1,176,837
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
1

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

 
Quarter Ended
 December 31,
Six Months Ended
 December 31,
 
2020
2019
2020
2019
Interest income:
       
    Loans receivable, net
$
8,344
 
$
10,320
 
$
17,261
 
$
20,395
 
    Investment securities
448
 
567
 
926
 
1,181
 
    FHLB – San Francisco stock
100
 
145
 
200
 
288
 
    Interest-earning deposits
17
 
189
 
41
 
435
 
    Total interest income
8,909
 
11,221
 
18,428
 
22,299
 
         
Interest expense:
       
    Checking and money market deposits
79
 
117
 
170
 
227
 
    Savings deposits
54
 
131
 
132
 
265
 
    Time deposits
335
 
530
 
717
 
1,062
 
    Borrowings
803
 
804
 
1,605
 
1,524
 
    Total interest expense
1,271
 
1,582
 
2,624
 
3,078
 
         
Net interest income
7,638
 
9,639
 
15,804
 
19,221
 
Provision (recovery) for loan losses
39
 
(22
)
259
 
(203
)
Net interest income, after provision (recovery) for loan losses
7,599
 
9,661
 
15,545
 
19,424
 
         
Non-interest income:
       
    Loan servicing and other fees
120
 
367
 
525
 
500
 
    Deposit account fees
329
 
451
 
639
 
898
 
    Card and processing fees
368
 
371
 
732
 
761
 
    Other
157
 
155
 
237
 
255
 
    Total non-interest income
974
 
1,344
 
2,133
 
2,414
 
         
Non-interest expense:
       
    Salaries and employee benefits
4,301
 
4,999
 
8,744
 
9,984
 
    Premises and occupancy
865
 
880
 
1,768
 
1,758
 
    Equipment
273
 
262
 
548
 
541
 
    Professional expenses
402
 
331
 
816
 
739
 
    Sales and marketing expenses
227
 
212
 
340
 
329
 
    Deposit insurance premiums and regulatory assessments
141
 
59
 
275
 
43
 
    Other
707
 
811
 
1,410
 
1,398
 
    Total non-interest expense
6,916
 
7,554
 
13,901
 
14,792
 
         
Income before income taxes
1,657
 
3,451
 
3,777
 
7,046
 
Provision for income taxes
481
 
1,053
 
1,116
 
2,086
 
    Net income
$
1,176
 
$
2,398
 
$
2,661
 
$
4,960
 
         
Basic earnings per share
$
0.16
 
$
0.32
 
$
0.36
 
$
0.66
 
Diluted earnings per share
$
0.16
 
$
0.31
 
$
0.36
 
$
0.65
 
Cash dividends per share
$
0.14
 
$
0.14
 
$
0.28
 
$
0.28
 

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

2


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

 
For the Quarter Ended
 December 31,
For the Six Months Ended
 December 31,
 
2020
2019
2020
2019
Net income
$
1,176
 
$
2,398
 
$
2,661
 
$
4,960
 
         
Change in unrealized holding loss on securities available for sale
(27
)
(21
)
(34
)
(40
)
Reclassification adjustment for net loss on securities available
  for sale included in net loss
 
 
 
 
Other comprehensive loss, before income taxes
(27
)
(21
)
(34
)
(40
)
         
Income tax benefit
(8
)
(6
)
(10
)
(12
)
Other comprehensive loss
(19
)
(15
)
(24
)
(28
)
         
Total comprehensive income
$
1,157
 
$
2,383
 
$
2,637
 
$
4,932
 







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

3

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

For the Quarter Ended December 31, 2020 and 2019:
 
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
 
 
Shares
Amount
Total
Balance at September 30, 2020
7,441,259
 
$
181
 
$
95,948
 
$
194,789
 
$
(166,358
)
$
99
 
$
124,659
 
               
Net income
     
1,176
     
1,176
 
Other comprehensive loss
         
(19
)
(19
)
Purchase of treasury stock (1)
(505
)
     
(6
)
 
(6
)
Distribution of restricted stock
1,500
                 
Amortization of restricted stock
   
200
       
200
 
Stock options expense
   
16
       
16
 
Cash dividends (2)
     
(1,042
)
   
(1,042
)
               
Balance at December 31, 2020
7,442,254
 
$
181
 
$
96,164
 
$
194,923
 
$
(166,364
)
$
80
 
$
124,984
 

(1)
Includes the purchase of 505 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 December 31, 2020.








 
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
 
 
Shares
Amount
Total
Balance at September 30, 2019
7,479,682
 
$
181
 
$
94,795
 
$
192,354
 
$
(165,309
)
$
148
 
$
122,169
 
               
Net income
     
2,398
     
2,398
 
Other comprehensive loss
         
(15
)
(15
)
Purchase of treasury stock
(2,361
)
     
(51
)
 
(51
)
Exercise of stock options
5,750
   
83
       
83
 
Amortization of restricted stock
   
219
       
219
 
Stock options expense
   
21
       
21
 
Cash dividends (1)
     
(1,048
)
   
(1,048
)
               
Balance at December 31, 2019
7,483,071
 
$
181
 
$
95,118
 
$
193,704
 
$
(165,360
)
$
133
 
$
123,776
 

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



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

4


For the Six Months Ended December 31, 2020 and 2019:
 
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
 
 
Shares
Amount
Total
Balance at June 30, 2020
7,436,315
 
$
181
 
$
95,593
 
$
194,345
 
$
(166,247
)
$
104
 
$
123,976
 
               
Net income
     
2,661
     
2,661
 
Other comprehensive loss
         
(24
)
(24
)
Purchase of treasury stock (1)
(3,061
)
     
(36
)
 
(36
)
Distribution of restricted stock
9,000
                 
Forfeiture of restricted stock
           
81
         
(81
)
       
 
Amortization of restricted stock
   
441
       
441
 
Stock options expense
   
49
       
49
 
Cash dividends (2)
     
(2,083
)
   
(2,083
)
               
Balance at December 31, 2020
7,442,254
 
$
181
 
$
96,164
 
$
194,923
 
$
(166,364
)
$
80
 
$
124,984
 

(1)
Includes the purchase of 3,061 shares of distributed restricted stock in settlement of employee withholding tax obligations.
(2)
Cash dividends of $0.28 per share were paid in the six months ended December 31, 2020.

 
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
 
 
Shares
Amount
Total
Balance at June 30, 2019
7,486,106
 
$
181
 
$
94,351
 
$
190,839
 
$
(164,891
)
$
161
 
$
120,641
 
               
Net income
     
4,960
     
4,960
 
Other comprehensive loss
         
(28
)
(28
)
Purchase of treasury stock
(19,285
)
     
(397
)
 
(397
)
Exercise of stock options
16,250
   
215
       
215
 
Forfeiture of restricted stock
           
72
         
(72
)
       
   
Amortization of restricted stock
   
439
       
439
 
Stock options expense
   
41
       
41
 
Cash dividends (1)
     
(2,095
)
   
(2,095
)
               
Balance at December 31, 2019
7,483,071
 
$
181
 
$
95,118
 
$
193,704
 
$
(165,360
)
$
133
 
$
123,776
 

 (1)   Cash dividends of $0.28 per share were paid in the six months ended December 31, 2019.




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

5

PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited - In Thousands)
 
Six Months Ended
December 31,
 
2020
2019
Cash flows from operating activities:
   
    Net income
$
2,661
 
$
4,960
 
    Adjustments to reconcile net income to net cash provided by operating activities:
   
        Depreciation and amortization
2,796
 
1,356
 
        Provision (recovery) for loan losses
259
 
(203
)
        Stock-based compensation
490
 
480
 
        (Benefit) provision for deferred income taxes
(344
)
1,432
 
    Increase (decrease) in accounts payable, accrued interest and other liabilities
952
 
(2,923
)
    Increase in prepaid expenses and other assets
(81
)
(3,025
)
            Net cash provided by operating activities
6,733
 
2,077
 
     
Cash flows from investing activities:
   
    Decrease (increase) in loans held for investment, net
46,464
 
(61,773
)
    Maturity of investment securities held to maturity
600
 
 
    Principal payments from investment securities held to maturity
21,269
 
16,702
 
    Principal payments from investment securities available for sale
527
 
695
 
    Purchase of investment securities held to maturity
(107,230
)
 
    Purchase of premises and equipment
(207
)
(148
)
            Net cash used for investing activities
(38,577
)
(44,524
)
     
Cash flows from financing activities:
   
    Increase (decrease) in deposits, net
16,999
 
(7,621
)
    Repayments of short-term borrowings, net
(5,000
)
 
    Repayments of long-term borrowings
(20,032
)
(29
)
    Proceeds from long-term borrowings
 
30,007
 
    Exercise of stock options
 
215
 
    Withholding taxes on stock based compensation
(37
)
(32
)
    Cash dividends
(2,083
)
(2,095
)
    Treasury stock purchases
(36
)
(397
)
            Net cash (used for) provided by financing activities
(10,189
)
20,048
 
Net decrease in cash and cash equivalents
(42,033
)
(22,399
)
Cash and cash equivalents at beginning of period
116,034
 
70,632
 
Cash and cash equivalents at end of period
$
74,001
 
$
48,233
 
Supplemental information:
   
    Cash paid for interest
$
2,742
 
$
3,091
 
    Cash paid for income taxes
$
2,470
 
$
350
 
    Transfer of loans held for sale to held for investment
$
 
$
1,085
 

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

6

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

December 31, 2020

Note 1: Basis of Presentation

The unaudited interim condensed consolidated financial statements included herein reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of the results of operations for the interim periods presented.  All such adjustments are of a normal, recurring nature.  The condensed consolidated statement of financial condition at June 30, 2020 is derived from the audited consolidated financial statements of Provident Financial Holdings, Inc. and its wholly-owned subsidiary, Provident Savings Bank, F.S.B. (the “Bank”) (collectively, the “Corporation”).  Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) with respect to interim financial reporting.  It is recommended that these unaudited interim condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended June 30, 2020.  The results of operations for the quarter and six months ended December 31, 2020 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2021.

Note 2: Accounting Standard Updates (“ASU”)

There have been no accounting standard updates or changes in the status of their adoption that are significant to the Corporation as previously disclosed in Note 1 of the Corporation's Annual Report on Form 10-K for the year ended June 30, 2020, other than:

ASU 2018-13:
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which modifies disclosure requirements on fair value measurements to improve their effectiveness.” The guidance permits entities to consider materiality when evaluating fair value measurement disclosures and, among other modifications, requires certain new disclosures related to Level 3 fair value measurements. This guidance will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The guidance only affects disclosures in the notes to the condensed consolidated financial statements and will not otherwise affect the Corporation’s Condensed Consolidated Financial Statements. The adoption of this ASU did not have a material impact on its condensed consolidated financial statements. See Note 7 for additional discussion.



7


Note 3: Earnings Per Share

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

As of December 31, 2020 and 2019, there were outstanding options to purchase 549,000 shares and 554,500 shares of the Corporation’s common stock, respectively. Of those shares, as of December 31, 2020 and 2019, there were 135,000 shares and no shares, respectively, which were excluded from the diluted EPS computation as their effect was anti-dilutive. As of December 31, 2020 and 2019, there were outstanding restricted stock awards of 207,500 shares and 225,500 shares, respectively.

The following table provides the basic and diluted EPS computations for the quarter and six months ended December 31, 2020 and 2019, respectively.
 
For the Quarter Ended
December 31,
For the Six Months Ended
December 31,
(In Thousands, Except Earnings Per Share)
2020
2019
2020
2019
Numerator:
       
    Net income – numerator for basic earnings per share and
       diluted earnings per share - available to common
       stockholders
$
1,176
 
$
2,398
 
$
2,661
 
$
4,960
 
         
Denominator:
       
    Denominator for basic earnings per share:
       
        Weighted-average shares
7,442
 
7,482
 
7,439
 
7,482
 
         
        Effect of dilutive shares:
       
   Stock options
37
 
133
 
29
 
133
 
   Restricted stock
13
 
43
 
7
 
36
 
         
    Denominator for diluted earnings per share:
       
        Adjusted weighted-average shares and assumed
          conversions
7,492
 
7,658
 
7,475
 
7,651
 
         
Basic earnings per share
$
0.16
 
$
0.32
 
$
0.36
 
$
0.66
 
Diluted earnings per share
$
0.16
 
$
0.31
 
$
0.36
 
$
0.65
 




8

Note 4: Investment Securities

The amortized cost and estimated fair value of investment securities as of December 31, 2020 and June 30, 2020 were as follows:

December 31, 2020
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Estimated
Fair
Value
Carrying
Value
(In Thousands)
         
Held to maturity:
         
   U.S. government sponsored enterprise MBS (1)
$
200,195
 
$
3,433
 
$
(63
)
$
203,565
 
$
200,195
 
   U.S. SBA securities (2)
1,903
 
 
(17
)
1,886
 
1,903
 
   Certificate of deposits
1,000
 
 
 
1,000
 
1,000
 
Total investment securities - held to maturity
$
203,098
 
$
3,433
 
$
(80
)
$
206,451
 
$
203,098
 
           
Available for sale:
         
   U.S. government agency MBS
$
2,463
 
$
88
 
$
 
$
2,551
 
$
2,551
 
   U.S. government sponsored enterprise MBS
1,420
 
14
 
 
1,434
 
1,434
 
   Private issue CMO (3)
174
 
 
(1
)
173
 
173
 
Total investment securities - available for sale
$
4,057
 
$
102
 
$
(1
)
$
4,158
 
$
4,158
 
Total investment securities
$
207,155
 
$
3,535
 
$
(81
)
$
210,609
 
$
207,256
 

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

June 30, 2020
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Estimated
Fair
Value
Carrying
Value
(In Thousands)
         
Held to maturity:
         
U.S. government sponsored enterprise MBS
$
115,763
 
$
2,636
 
$
(45
)
$
118,354
 
$
115,763
 
U.S. SBA securities
2,064
 
 
(17
)
2,047
 
2,064
 
Certificate of deposits
800
 
 
 
800
 
800
 
Total investment securities - held to maturity
$
118,627
 
$
2,636
 
$
(62
)
$
121,201
 
$
118,627
 
           
Available for sale:
         
U.S. government agency MBS
$
2,823
 
$
120
 
$
 
$
2,943
 
$
2,943
 
U.S. government sponsored enterprise MBS
1,556
 
21
 
 
1,577
 
1,577
 
Private issue CMO
204
 
 
(7
)
197
 
197
 
Total investment securities - available for sale
$
4,583
 
$
141
 
$
(7
)
$
4,717
 
$
4,717
 
Total investment securities
$
123,210
 
$
2,777
 
$
(69
)
$
125,918
 
$
123,344
 

In the second quarter of fiscal 2021 and 2020, the Corporation received MBS principal payments of $12.4 million and $8.1 million, respectively, and there were no sales of investment securities during these periods. The Corporation purchased $21.5 million of U.S. government sponsored enterprise MBS to be held to maturity in the second quarter of fiscal 2021 but did not purchase any investment securities in the second quarter of fiscal 2020.

9

For the first six months of fiscal 2021 and 2020, the Corporation received MBS principal payments of $21.8 million and $17.4 million, respectively, and there were no sales of investment securities during these periods. The Corporation purchased $106.4 million of U.S. government sponsored enterprise MBS to be held to maturity in the first six months of fiscal 2021 but did not purchase any investment securities in the same period of fiscal 2020.

The Corporation held investments with an unrealized loss position of $81,000 at December 31, 2020 and $69,000 at June 30, 2020.
As of December 31, 2020
Unrealized Holding
Losses
 
Unrealized Holding
Losses
 
Unrealized Holding
Losses
(In Thousands)
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
Unrealized
 
Fair
Unrealized
 
Fair
Unrealized
Description  of Securities
Value
Losses
 
Value
Losses
 
Value
Losses
Held to maturity:
               
   U.S. government sponsored enterprise MBS
$
10,015
 
$
63
   
$
 
$
   
$
10,015
 
$
63
 
   U.S. SBA securities
 
 
$
     
1,886
   
17
     
1,886
   
17
 
Total investment securities – held to maturity
$
10,015
 
$
63
   
$
1,886
 
$
17
   
$
11,901
 
$
80
 
                                         
Available for sale:
                                       
Private issue CMO
$
173
 
$
1
   
$
 
$
   
$
173
 
$
1
 
Total investment securities – available for sale
$
173
 
$
1
   
$
 
$
   
$
173
 
$
1
 
Total investment securities
$
10,188
 
$
64
   
$
1,886
 
$
17
   
$
12,074
 
$
81
 


As of June 30, 2020
Unrealized Holding
Losses
 
Unrealized Holding
Losses
 
Unrealized Holding
Losses
(In Thousands)
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
Unrealized
 
Fair
Unrealized
 
Fair
Unrealized
Description  of Securities
Value
Losses
 
Value
Losses
 
Value
Losses
Held to maturity:
               
   U.S. government sponsored enterprise MBS
$
12,731
 
$
45
   
$
 
$
   
$
12,731
 
$
45
 
   U.S. SBA securities
 
 
$
     
2,040
   
17
     
2,040
   
17
 
Total investment securities – held to maturity
$
12,731
 
$
45
   
$
2,040
 
$
17
   
$
14,771
 
$
62
 
                                         
Available for sale:
                                       
Private issue CMO
$
197
 
$
7
   
$
 
$
   
$
197
 
$
7
 
Total investment securities – available for sale
$
197
 
$
7
   
$
 
$
   
$
197
 
$
7
 
Total investment securities
$
12,928
 
$
52
   
$
2,040
 
$
17
   
$
14,968
 
$
69
 

The Corporation evaluates individual investment securities quarterly for other-than-temporary declines in market value. At December 31, 2020, $17,000 of the $81,000 unrealized holding losses were 12 months or more; while at June 30, 2020, $17,000 of the $69,000 unrealized holding losses were 12 months or more. The unrealized losses on investment securities were attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. At December 31, 2020 and 2019, the Corporation did not have any investment securities with the intent to sell and determined it was more likely than not that the Corporation would not be required to sell the

10

securities prior to recovery of the amortized cost basis; therefore, no impairment losses were recorded for the quarter ended December 31, 2020 and 2019.

Contractual maturities of investment securities as of December 31, 2020 and June 30, 2020 were as follows:
 
December 31, 2020
 
June 30, 2020
(In Thousands)
Amortized
Cost
Estimated
Fair
Value
 
Amortized
Cost
Estimated
Fair
Value
           
Held to maturity:
         
Due in one year or less
$
1,000
 
$
1,000
   
$
800
 
$
800
 
Due after one through five years
19,081
 
19,913
   
19,389
 
20,194
 
Due after five through ten years
76,934
 
78,367
   
50,895
 
52,315
 
Due after ten years
106,083
 
107,171
   
47,543
 
47,892
 
Total investment securities - held to maturity
$
203,098
 
$
206,451
   
$
118,627
 
$
121,201
 
           
Available for sale:
         
Due in one year or less
$
 
$
   
$
 
$
 
Due after one through five years
 
   
 
 
Due after five through ten years
 
   
 
 
Due after ten years
4,057
 
4,158
   
4,583
 
4,717
 
Total investment securities - available for sale
$
4,057
 
$
4,158
   
$
4,583
 
$
4,717
 
Total investment securities
$
207,155
 
$
210,609
   
$
123,210
 
$
125,918
 







11

Note 5: Loans Held for Investment

Loans held for investment, net of fair value adjustments, consisted of the following:
(In Thousands)
December 31,
2020
June 30,
2020
Mortgage loans:
   
    Single-family
$
257,864
 
$
298,810
 
    Multi-family
 488,412
 
491,903
 
    Commercial real estate
 102,551
 
105,235
 
    Construction (1)
 7,135
 
7,801
 
    Other
 141
 
143
 
Commercial business loans (2)
 882
 
480
 
Consumer loans (3)
 95
 
94
 
    Total loans held for investment, gross
857,080
 
904,466
 
     
Advance payments of escrows
142
 
68
 
Deferred loan costs, net
6,402
 
6,527
 
Allowance for loan losses
(8,538
)
(8,265
)
      Total loans held for investment, net
$
855,086
 
$
902,796
 

(1)
Net of $2.7 million and $4.0 million of undisbursed loan funds as of December 31, 2020 and June 30, 2020, respectively.
(2)
Net of $520 thousand and $935 thousand of undisbursed lines of credit as of December 31, 2020 and June 30, 2020, respectively.
(3)
Net of $422 thousand and $448 thousand of undisbursed lines of credit as of December 31, 2020 and June 30, 2020, respectively.

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

 
Adjustable Rate
   
(In Thousands)
Within One
Year
After
One Year
Through 3
Years
After
3 Years
Through 5
Years
After
5 Years
Through 10
Years
Fixed Rate
Total
Mortgage loans:
           
    Single-family
$
69,861
 
$
51,462
 
$
62,242
 
$
64,482
 
$
9,817
 
$
257,864
 
    Multi-family
162,764
 
154,224
 
153,475
 
17,810
 
139
 
488,412
 
    Commercial real estate
48,239
 
30,205
 
23,822
 
 
285
 
102,551
 
    Construction
6,477
 
 
 
 
658
 
7,135
 
    Other
 
 
 
 
141
 
141
 
Commercial business loans
500
 
 
 
 
382
 
882
 
Consumer loans
95
 
 
 
 
 
95
 
    Total loans held for investment,
      gross
$
287,936
 
$
235,891
 
$
239,539
 
$
82,292
 
$
11,422
 
$
857,080
 

12

The Corporation has developed an internal loan grading system to evaluate and quantify the Bank’s loans held for investment portfolio with respect to quality and risk.  Management continually evaluates the credit quality of the Corporation’s loan portfolio and conducts a quarterly review of the adequacy of the allowance for loan losses using quantitative and qualitative methods. The Corporation has adopted an internal risk rating policy in which each loan is rated for credit quality with a rating of pass, special mention, substandard, doubtful or loss.  The two primary components that are used during the loan review process to determine the proper allowance levels are individually evaluated allowances and collectively evaluated allowances.  Quantitative loan loss factors are developed by determining the historical loss experience, expected future cash flows, discount rates and collateral fair values, among others.  Qualitative loan loss factors are developed by assessing general economic indicators such as gross domestic product, retail sales, unemployment rates, employment growth, California home sales and median California home prices as well as the forecasted economic impact of the novel coronavirus of 2019 (“COVID-19”).  The Corporation assigns individual factors for the quantitative and qualitative methods for each loan category and each internal risk rating.

The Corporation categorizes all of the loans held for investment into risk categories based on relevant information about the ability of the borrower to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  A description of the general characteristics of the risk grades is as follows:
Pass - These loans range from minimal credit risk to average, but still acceptable, credit risk.  The likelihood of loss is considered remote.
Special Mention - A special mention loan has potential weaknesses that may be temporary or, if left uncorrected, may result in a loss.  While concerns exist, the bank is currently protected and loss is considered unlikely and not imminent.
Substandard - A substandard loan is inadequately protected by the current sound net worth and paying capacity of the borrower or of the collateral pledged, if any.  Loans so classified must have a well-defined weakness, or weaknesses, that may jeopardize the liquidation of the debt.  A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
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:
   
December 31, 2020
(In Thousands)
Single-
family
Multi-
family
Commercial
Real Estate
Construction
Other
Mortgage
Commercial Business
Consumer
Total
                   
Pass
$
245,747
 
$
484,680
 
$
102,551
 
$
7,135
 
$
141
 
$
882
 
$
95
 
$
841,231
 
Special Mention
935
 
3,732
 
 
   
 
 
 
4,667
 
Substandard
11,182
 
 
 
   
 
 
 
11,182
 
 
Total loans held for
   investment, gross
$
257,864
 
$
488,412
 
$
102,551
 
$
7,135
 
$
141
 
$
882
 
$
95
 
$
857,080
 


13

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

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

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


14

The following table is provided to disclose additional details for the periods indicated on the Corporation’s allowance for loan losses:
 
For the Quarter Ended
December 31,
For the Six Months Ended
December 31,
(Dollars in Thousands)
2020
2019
2020
2019
         
Allowance at beginning of period
$
8,490
 
$
6,929
 
$
8,265
 
$
7,076
 
         
Provision (recovery) for loan losses
39
 
(22
)
259
 
(203
)
         
Recoveries:
       
Mortgage loans:
       
        Single-family
9
 
13
 
14
 
49
 
Consumer loans
1
 
1
 
1
 
1
 
    Total recoveries
10
 
14
 
15
 
50
 
         
Charge-offs:
       
Mortgage loans:
       
        Single-family
 
 
 
(1
)
Consumer loans
(1
)
 
(1
)
(1
)
    Total charge-offs
(1
)
 
(1
)
(2
)
         
    Net recoveries (charge-offs)
9
 
14
 
14
 
48
 
        Balance at end of period
$
8,538
 
$
6,921
 
$
8,538
 
$
6,921
 
         
Allowance for loan losses as a percentage of gross
  loans held for investment at the end of the period
0.99
%
0.73
%
0.99
%
0.73
%
Net (recoveries) charge-offs as a percentage of average
  loans receivable, net, during the period (annualized)
(0.00)
%
(0.01)
%
(0.00)
%
(0.01)
%





15

The following tables denote the past due status of the Corporation's gross loans held for investment, net of fair value adjustments, at the dates indicated.
   
December 31, 2020
(In Thousands)
Current
30-89 Days
Past Due
Non-Accrual (1)
Total Loans Held for
Investment, Gross
           
Mortgage loans:
       
 
Single-family
$
246,334
 
$
348
 
$
11,182
 
$
257,864
 
 
Multi-family
488,412
 
 
 
488,412
 
 
Commercial real estate
102,551
 
 
 
102,551
 
 
Construction
7,135
 
 
 
7,135
 
 
Other
141
 
 
 
141
 
Commercial business loans
882
 
 
 
882
 
Consumer loans
93
 
2
 
 
95
 
 
Total loans held for investment, gross
$
845,548
 
$
350
 
$
11,182
 
$
857,080
 

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

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

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


16

The following tables summarize the Corporation’s allowance for loan losses and recorded investment in gross loans, by portfolio type, at the dates and for the periods indicated.
   
Quarter Ended December 31, 2020
 
(In Thousands)
Single-
family
Multi-family
Commercial
Real Estate
Construction
 
Other
 
Commercial Business
Consumer
Total
 
Allowance for loan losses:
                     
Allowance at beginning of  period
$
2,671
 
$
4,490
 
$
1,162
 
$
116
 
$
3
 
$
42
 
$
6
 
$
8,490
     
Provision (recovery) for loan losses
26
 
50
 
(30
)
(6
)
 
 
(1
)
 
39
     
Recoveries
9
 
 
 
   
 
 
1
 
10
     
Charge-offs
 
 
 
   
 
 
(1
)
(1
)
   
 
Allowance for loan losses,
  end of period
$
2,706
 
$
4,540
 
$
1,132
 
$
110
 
$
3
 
$
41
 
$
6
 
$
8,538
     
                         
Allowance for loan losses:
                     
Individually evaluated for impairment
$
570
 
$
 
$
 
$
 
$
 
$
 
$
 
$
570
     
Collectively evaluated for impairment
2,136
 
4,540
 
1,132
 
110
   
3
 
41
 
6
 
7,968
     
 
Allowance for loan losses,
  end of period
$
2,706
 
$
4,540
 
$
1,132
 
$
110
 
$
3
 
$
41
 
$
6
 
$
8,538
     
                         
Loans held for investment:
                     
Individually evaluated for impairment
$
9,237
 
$
 
$
 
$
 
$
 
$
 
$
 
$
9,237
     
Collectively evaluated for impairment
248,627
 
488,412
 
102,551
 
7,135
   
141
 
882
 
95
 
847,843
     
 
Total loans held for investment,
  gross
$
257,864
 
$
488,412
 
$
102,551
 
$
7,135
 
$
141
 
$
882
 
$
95
 
$
857,080
     
Allowance for loan losses as
  a percentage of gross loans
  held for investment
  1.05
%
  0.93
%
  1.10
%
  1.54
%
  2.13
%
  4.65
%
  6.32
%
  0.99
%
   




17

   
Quarter Ended December 31, 2019
(In Thousands)
Single-
family

Multi-family
Commercial
Real Estate
Construction
 
Commercial
Business
Consumer
Total
Allowance for loan losses:
               
Allowance at beginning of period
$
2,234
 
$
3,507
 
$
1,085
 
$
74
 
$
20
 
$
9
 
$
6,929
 
Provision (recovery) for loan losses
(90
)
(5
)
(27
)
94
   
8
 
(2
)
(22
)
Recoveries
13
 
 
 
   
 
1
 
14
 
Charge-offs
 
 
 
   
 
 
 
 
Allowance for loan losses,
  end of period
$
2,157
 
$
3,502
 
$
1,058
 
$
168
 
$
28
 
$
8
 
$
6,921
 
                   
Allowance for loan losses:
               
Individually evaluated for impairment
$
46
 
$
 
$
 
$
 
$
6
 
$
 
$
52
 
Collectively evaluated for impairment
2,111
 
3,502
 
1,058
 
168
   
22
 
8
 
6,869
 
 
Allowance for loan losses,
  end of period
$
2,157
 
$
3,502
 
$
1,058
 
$
168
 
$
28
 
$
8
 
$
6,921
 
                   
Loans held for investment:
               
Individually evaluated for impairment
$
3,053
 
$
 
$
 
$
 
$
43
 
$
 
$
3,096
 
Collectively evaluated for impairment
344,291
 
479,151
 
107,613
 
6,914
   
535
 
140
 
938,644
 
 
Total loans held for investment,
  gross
$
347,344
 
$
479,151
 
$
107,613
 
$
6,914
 
$
578
 
$
140
 
$
941,740
 
Allowance for loan losses as
  a percentage of gross loans
  held for investment
  0.62
%
  0.73
%
  0.98
%
  2.43
%   4.84
%
  5.71
%
  0.73
%





18

   
Six Months Ended December 31, 2020
 
(In Thousands)
Single-
family

Multi-family
Commercial
Real Estate
Construction
 
Other
 
Commercial Business
Consumer
Total
 
Allowance for loan losses:
                     
Allowance at beginning of period
$
2,622
 
$
4,329
 
$
1,110
 
$
171
 
$
3
 
$
24
 
$
6
 
$
8,265
     
Provision (recovery) for loan losses
70
 
211
 
22
 
(61
)
 
 
17
 
 
259
     
Recoveries
14
 
 
 
   
 
 
1
 
15
     
Charge-offs
 
 
 
   
 
 
(1
)
(1
)
   
 
Allowance for loan losses,
  end of period
$
2,706
 
$
4,540
 
$
1,132
 
$
110
 
$
3
 
$
41
 
$
6
 
$
8,538
     
                         
Allowance for loan losses:
                     
Individually evaluated for impairment
$
570
 
$
 
$
 
$
 
$
 
$
 
$
 
$
570
     
Collectively evaluated for impairment
2,136
 
4,540
 
1,132
 
110
   
3
 
41
 
6
 
7,968
     
 
Allowance for loan losses,
  end of period
$
2,706
 
$
4,540
 
$
1,132
 
$
110
 
$
3
 
$
41
 
$
6
 
$
8,538
     
                         
Loans held for investment:
                     
Individually evaluated for impairment
$
9,237
 
$
 
$
 
$
 
$
 
$
 
$
 
$
9,237
     
Collectively evaluated for impairment
248,627
 
488,412
 
102,551
 
7,135
   
141
 
882
 
95
 
847,843
     
 
Total loans held for investment,
  gross
$
257,864
 
$
488,412
 
$
102,551
 
$
7,135
 
$
141
 
$
882
 
$
95
 
$
857,080
     
Allowance for loan losses as
  a percentage of gross loans
  held for investment
  1.05
%
  0.93
%
  1.10
%
  1.54
%
  2.13
%
  4.65
%
  6.32
%
  0.99
%
   





19

   
Six Months Ended December 31, 2019
(In Thousands)
Single-
family

Multi-family
Commercial
Real Estate
Construction
 
Other
 
Commercial Business
Consumer
Total
Allowance for loan losses:
                   
Allowance at beginning of period
$
2,709
 
$
3,219
 
$
1,050
 
$
61
 
$
3
 
$
26
 
$
8
 
$
7,076
 
Provision (recovery) for loan losses
(600
)
283
 
8
 
107
   
(3
)
2
 
 
(203
)
Recoveries
49
 
 
 
   
 
 
1
 
50
 
Charge-offs
(1
)
 
 
   
 
 
(1
)
(2
)
 
Allowance for loan losses,
  end of period
$
2,157
 
$
3,502
 
$
1,058
 
$
168
 
$
 
$
28
 
$
8
 
$
6,921
 
                       
Allowance for loan losses:
                   
Individually evaluated for impairment
$
46
 
$
 
$
 
$
 
$
 
$
6
 
$
 
$
52
 
Collectively evaluated for impairment
2,111
 
3,502
 
1,058
 
168
   
 
22
 
8
 
6,869
 
 
Allowance for loan losses,
  end of period
$
2,157
 
$
3,502
 
$
1,058
 
$
168
 
$
 
$
28
 
$
8
 
$
6,921
 
                       
Loans held for investment:
                   
Individually evaluated for impairment
$
3,053
 
$
 
$
 
$
 
$
 
$
43
 
$
 
$
3,096
 
Collectively evaluated for impairment
344,291
 
479,151
 
107,613
 
6,914
   
 
535
 
140
 
938,644
 
 
Total loans held for investment,
  gross
$
347,344
 
$
479,151
 
$
107,613
 
$
6,914
 
$
 
$
578
 
$
140
 
$
941,740
 
Allowance for loan losses as
  a percentage of gross loans
  held for investment
  0.62
%
  0.73
%
  0.98
%
  2.43
%
  %
  4.84
%
  5.71
%
  0.73
%





20

The following tables identify the Corporation’s total recorded investment in non-performing loans by type at the dates and for the periods indicated.  Generally, a loan is placed on non-accrual status when it becomes 90 days past due as to principal or interest or if the loan is deemed impaired, after considering economic and business conditions and collection efforts, where the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful.  In addition, interest income is not recognized on any loan where management has determined that collection is not reasonably assured.  A non-performing loan may be restored to accrual status when delinquent principal and interest payments are brought current, the borrower(s) has demonstrated sustained payment performance and future monthly principal and interest payments are expected to be collected on a timely basis.  Loans with a related allowance reserve have been individually evaluated for impairment using either a discounted cash flow analysis or, for collateral dependent loans, current appraisals less costs to sell, to establish realizable value.  This analysis may identify a specific impairment amount needed or may conclude that no reserve is needed.  Loans that are not individually evaluated for impairment are included in pools of homogeneous loans for evaluation of related allowance reserves.
     
At December 31, 2020
     
Unpaid
     
Net
     
Principal
Related
Recorded
 
Recorded
(In Thousands)
Balance
Charge-offs
Investment
Allowance (1)
Investment
               
Mortgage loans:
         
 
Single-family:
         
   
With a related allowance
$
9,636
 
$
 
$
9,636
 
$
(928
)
$
8,708
 
   
Without a related allowance (2)
2,015
 
(453
)
1,562
 
 
1,562
 
 
Total single-family
11,651
 
(453
)
11,198
 
(928
)
10,270
 
               
Total non-performing loans
$
11,651
 
$
(453
)
$
11,198
 
$
(928
)
$
10,270
 

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




21

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

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

At December 31, 2020, there were no commitments to lend additional funds to those borrowers whose loans were classified as non-performing.

For the quarter ended December 31, 2020 and 2019, the Corporation’s average recorded investment in non-performing loans was $9.9 million and $4.0 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 the quarter ended December 31, 2020, the Bank received $43,000 in interest payments from non-performing loans, of which $29,000 was recognized as interest income and the remaining $14,000 was applied to reduce the loan balances under the cost recovery method.  In comparison, for the quarter ended December 31, 2019, the Bank received $57,000 in interest payments from non-performing loans, of which $34,000 was recognized as interest income and the remaining $23,000 was applied to reduce the loan balances under the cost recovery method.

For the six months ended December 31, 2020 and 2019, the Corporation’s average recorded investment in non-performing loans was $7.6 million and $4.7 million, respectively.  For the six months ended December 31, 2020, the Bank received $93,000 in interest payments from non-performing loans, of which $70,000 was recognized as interest income and the remaining $23,000 was applied to reduce the loan balances under the cost recovery method.  In comparison, for the six months ended December 31, 2019, the Bank received $204,000 in interest payments from non-performing loans, of which $157,000 was recognized as interest income and the remaining $47,000 was applied to reduce the loan balances under the cost recovery method.


22

The following tables present the average recorded investment in non-performing loans and the related interest income recognized for the quarter and six months ended December 31, 2020 and 2019:
     
Quarter Ended December 31,
     
2020
 
2019
     
Average
Interest
 
Average
Interest
     
Recorded
Income
 
Recorded
Income
(In Thousands)
Investment
Recognized
 
Investment
Recognized
               
Without related allowances:
         
 
Mortgage loans:
         
   
Single-family
$
1,570
 
$
   
$
2,874
 
$
21
 
     
1,570
 
   
2,874
 
21
 
               
With related allowances:
         
 
Mortgage loans:
         
   
Single-family
8,285
 
29
   
1,105
 
12
 
 
Commercial business loans
19
 
   
44
 
1
 
   
8,304
 
29
   
1,149
 
13
 
             
 
Total
$
9,874
 
$
29
   
$
4,023
 
$
34
 


     
Six Months Ended December 31,
     
2020
 
2019
     
Average
Interest
 
Average
Interest
     
Recorded
Income
 
Recorded
Income
(In Thousands)
Investment
Recognized
 
Investment
Recognized
               
Without related allowances:
         
 
Mortgage loans:
         
   
Single-family
$
1,726
 
$
   
$
2,980
 
$
111
 
   
Construction
 
   
542
 
20
 
     
1,726
 
   
3,522
 
131
 
               
With related allowances:
         
 
Mortgage loans:
         
   
Single-family
5,897
 
69
   
1,151
 
24
 
 
Commercial business loans
26
 
1
   
45
 
2
 
   
5,923
 
70
   
1,196
 
26
 
             
 
Total
$
7,649
 
$
70
   
$
4,718
 
$
157
 

For the quarter ended December 31, 2020, 16 loans were newly restructured (forbearance loans which were downgraded when their monthly payment deferrals were extended beyond six months, consistent with the Interagency Statement), while one restructured loan was upgraded to the pass category. For the quarter ended December 31, 2019, no new loans were restructured

23


from their original terms and classified as restructured loans, while one restructured loan was downgraded from pass to the substandard category and one restructured loan was upgraded from special mention to the pass category. During both quarters ended December 31, 2020 and 2019, no restructured loans were in default within a 12-month period subsequent to their original restructuring. Additionally, during the quarter ended December 31, 2020 and 2019, there was no loan whose modification was extended beyond the initial maturity of the modification. At both December 31, 2020 and June 30, 2020, there were no commitments to lend additional funds to those borrowers whose loans were restructured.

For the six months ended December 31, 2020, 17 loans were newly restructured (including 16 COVID-19 related loan forbearance modifications which were downgraded when their monthly payment deferrals were extended beyond six months, consistent with the Interagency Statement), while two restructured loans were upgraded to the pass category. For the six months ended December 31, 2019, no new loans were restructured from their original terms and classified as restructured loans, while two substandard restructured loans were paid off, one restructured loan was downgraded from pass to the substandard category and one restructured loan was upgraded from special mention to the pass category. During both six months ended December 31, 2020 and 2019, no restructured loans were in default within a 12-month period subsequent to their original restructuring. Additionally, during the six months ended December 31, 2020 and 2019, there was no loan whose modification was extended beyond the initial maturity of the modification.

As of December 31, 2020, the Corporation held 23 restructured loans with a net outstanding balance of $8.2 million, and all loans were classified as substandard and on non-accrual status. As of June 30, 2020, the Corporation held eight restructured loans with a net outstanding balance of $2.6 million, and all loans were classified as substandard on non-accrual status. As of December 31, 2020, all of the restructured loans were current with respect to their modified payment terms, as compared to June 30, 2020 when $1.2 million or 44 % of the restructured loans were current with respect to their modified payment terms.

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

To qualify for restructuring, a borrower must provide evidence of their creditworthiness such as, current financial statements, their most recent income tax returns, current paystubs, current W-2s, and most recent bank statements, among other documents, which are then verified by the Corporation.  The Corporation re-underwrites the loan with the borrower’s updated financial information, new credit report, current loan balance, new interest rate, remaining loan term, updated property value and modified payment schedule, among other considerations, to determine if the borrower qualifies.

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

 
At
At
(In Thousands)
December 31, 2020
June 30, 2020
Restructured loans on non-accrual status:
   
Mortgage loans:
   
Single-family
$
8,208
 
$
2,612
 
Commercial business loans
 
31
 
Total
8,208
 
2,643
 
     
Total restructured loans
$
8,208
 
$
2,643
 

24

The following tables identify the Corporation’s total recorded investment in restructured loans by type at the dates and for the periods indicated.
     
At December 31, 2020
     
Unpaid
     
Net
     
Principal
Related
Recorded
 
Recorded
(In Thousands)
Balance
Charge-offs
Investment
Allowance (1)
Investment
               
Mortgage loans:
         
 
Single-family:
         
   
With a related allowance
$
7,939
 
$
 
$
7,939
 
$
(587
)
$
7,352
 
   
Without a related allowance (2)
1,221
 
(365
)
856
 
 
856
 
 
Total single-family
9,160
 
(365
)
8,795
 
(587
)
8,208
 
               
Total restructured loans
$
9,160
 
$
(365
)
$
8,795
 
$
(587
)
$
8,208
 

(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.

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

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

During the quarter and six months ended December 31, 2020 and 2019, no properties were acquired in the settlement of loans and no previously foreclosed upon properties were sold. As of both December 31, 2020 and June 30, 2020, there was no real estate owned property.  A new appraisal is obtained on each of the properties at the time of foreclosure and fair value is derived by using the lower of the appraised value or the listing price of the property, net of selling costs.  Any initial loss is recorded as a charge to the allowance for loan losses before being transferred to real estate owned.  Subsequent to transfer to real estate owned, if there is further deterioration in real estate values, specific real estate owned loss reserves are established and charged to the condensed consolidated statements of operations.  In addition, the Corporation records costs to carry real estate owned as real estate owned operating expenses as incurred.

25

The Coronavirus Aid, Relief, and Economic Security Act of 2020 signed into law on March 27, 2020 ("CARES Act") and Interagency Statement provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act and Interagency Statement prior to any relief and were not extended beyond their initial six months of deferred payments, are not considered restructured loans. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. To qualify as an eligible loan under the CARES Act and Interagency Statement, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (a) 60 days after the date of termination of the national emergency declared by the President or (b) December 31, 2020. In addition, the bank regulatory agencies issued the Revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (“Interagency Statement”) stating that COVID-19 related short-term modifications (i.e., six months or less) granted to loans that were current as of the loan modification program implementation date are not restructured loans.

On December 27, 2020, the Consolidated Appropriations Act 2021 (H.R. 133) was signed into law. Among other purposes, this act provides coronavirus emergency response and relief, including extending relief offered under the CARES Act related to restructured loans as a result of COVID-19 through January 1, 2022 or 60 days after the end of the national emergency declared by the President, whichever is earlier.

As of December 31, 2020, the Corporation had six single-family forbearance loans, with outstanding balances of $1.8 million or 0.21 percent of total loans, and two multi-family loans with outstanding balances of $763,000 or 0.09 percent of total loans that were modified in accordance with the CARES Act and Interagency Statement. In addition, as of December 31, 2020, the Corporation had two pending requests for payment relief for a single-family loan of $684,000 and a multi-family loan of $1.1 million.

As of December 31, 2020, loan forbearance related to COVID-19 hardship requests are described below:

 
Forbearance Granted
Forbearance Completed (1)
Forbearance Remaining
(Dollars In Thousands)
Number of
Loans
Amount
Number of
Loans
Amount
Number of
Loans
Amount
Single-family loans
 
58
 
$
23,239
   
52
 
$
21,404
   
6
 
$
1,835
 
Multi-family loans
 
5
   
2,346
   
3
   
1,583
   
2
   
763
 
Commercial real estate loans
 
2
   
1,066
   
2
   
1,066
   
   
 
Total loan forbearance
 
65
 
$
26,651
   
57
 
$
24,053
   
8
 
$
2,598
 

(1)
Includes 16 single-family loans totaling $6.3 million which were subsequently extended and classified as restructured loans, consistent with the Interagency Statement.






26

As of December 31, 2020, certain characteristics of loans in forbearance are described below:

(Dollars In Thousands)
Number of Loans
Amount
% of
Total
Loans
Weighted
Avg. LTV (1)
Weighted
Avg. FICO (2)
Weighted
Avg. Debt
Coverage
Ratio (3)
Weighted Avg.
Forbearance
Period
Granted (4)
 
Single-family loans
 
6
 
$
1,835
 
0.21
%
 
75
%
 
725
   
N/A
   
6.0
 
Multi-family loans
 
2
   
763
 
0.09
%
 
56
%
 
711
   
1.26
x
 
5.0
 
Total loans in forbearance
 
8
 
$
2,598
 
0.30
%
 
69
%
 
721
   
1.26
x
 
5.7
 

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

Note 6: Derivative and Other Financial Instruments with Off-Balance Sheet Risks

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit in the form of originating loans or providing funds under existing lines of credit, loan sale commitments to third parties and option contracts.  These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the accompanying Condensed Consolidated Statements of Financial Condition.  The Corporation’s exposure to credit loss, in the event of non-performance by the counterparty to these financial instruments, is represented by the contractual amount of these instruments.  The Corporation uses the same credit policies in entering into financial instruments with off-balance sheet risk as it does for on-balance sheet instruments.  As of December 31, 2020 and June 30, 2020, the Corporation had commitments to extend credit on loans to be held for investment of $12.3 million and $13.6 million, respectively.

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
December 31, 2020
June 30, 2020
(In Thousands)
   
     
Undisbursed loan funds – Construction loans
$
2,736
 
$
4,029
 
Undisbursed lines of credit – Commercial business loans
520
 
935
 
Undisbursed lines of credit – Consumer loans
422
 
448
 
Commitments to extend credit on loans to be held for investment
12,281
 
13,579
 
Total
$
15,959
 
$
18,991
 

The following table provides information regarding the allowance for loan losses for the undisbursed funds and commitments to extend credit on loans to be held for investment for the quarter ended December 31, 2020 and 2019.
 
For the Quarter Ended
 December 31,
For the Six Months Ended
December 31,
(In Thousands)
2020
2019
2020
2019
Balance, beginning of the period
$
104
 
$
143
 
$
126
 
$
141
 
Recovery
(3
)
(5
)
(25
)
(3
)
Balance, end of the period
$
101
 
$
138
 
$
101
 
$
138
 

27

In accordance with ASC 815, “Derivatives and Hedging,” and interpretations of the Derivatives Implementation Group of the FASB, the fair value of the commitments to extend credit on loans to be held for sale, loan sale commitments, to be announced (“TBA”) MBS trades, put option contracts and call option contracts are recorded at fair value on the Condensed Consolidated Statements of Financial Condition. The Corporation does not apply hedge accounting to its derivative financial instruments; therefore, all changes in fair value are recorded in earnings. As of December 31, 2020 and June 30, 2020, there were no outstanding derivative financial instruments.

Loans previously sold to the FHLB – San Francisco under the Mortgage Partnership Finance (“MPF”) program have a recourse liability.  The FHLB – San Francisco absorbs the first four basis points of loss by establishing a first loss account and a credit scoring process is used to calculate the maximum recourse amount for the Bank.  All losses above the Bank’s maximum recourse amount are the responsibility of the FHLB – San Francisco.  The FHLB – San Francisco pays the Bank a credit enhancement fee on a monthly basis to compensate the Bank for accepting the recourse obligation.  As of December 31, 2020 and June 30, 2020, the Bank serviced $6.2 million and $7.4 million of loans under this program, respectively and has established a recourse liability of $40,000 and $70,000, respectively.

Occasionally, the Bank is required to repurchase loans sold to Freddie Mac, Fannie Mae or other investors if it is determined that such loans do not meet the credit requirements of the investor, or if one of the parties involved in the loan misrepresented pertinent facts, committed fraud, or if such loans were 90-days past due within 120 days of the loan funding date.  During the quarter ended December 31, 2020, the Bank did not repurchase any loans. In comparison during the same quarter last year, the Bank repurchased two single-family loans totaling $520,000 pursuant to the recourse/repurchase covenants contained in the loan sale agreements. During the six months ended December 31, 2020, the Bank did not repurchase any loans. In comparison, during the same period last year, the Bank repurchased three single-family loans totaling $1.1 million pursuant to the recourse/repurchase covenants contained in the loan sale agreements. There were no other repurchase requests that did not result in the repurchase of the loan itself, which were settled in the quarter and six months ended December 31, 2020 and 2019. In addition to the specific recourse liability for the MPF program, the Bank established a recourse liability of $350,000 and $200,000 for loans sold to other investors as of December 31, 2020 and June 30, 2020, respectively.

The following table shows the summary of the recourse liability for the quarter and six months ended December 31, 2020 and 2019:
 
For the Quarter Ended
December 31,
 For the Six Months Ended
December 31,
Recourse Liability
2020
2019
2020
2019
(In Thousands)
       
         
Balance, beginning of the period
$
370
 
$
250
 
$
270
 
$
250
 
Provision for recourse liability
20
 
 
120
 
 
Net settlements in lieu of loan repurchases
 
 
 
 
Balance, end of the period
$
390
 
$
250
 
$
390
 
$
250
 


Note 7: Fair Value of Financial Instruments

The Corporation adopted ASC 820, “Fair Value Measurements and Disclosures,” and elected the fair value option pursuant to ASC 825, “Financial Instruments.”  ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  ASC 825 permits entities to elect to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the “Fair Value Option”) at specified election dates.  At each subsequent reporting date, an entity is required to report unrealized gains and losses on items in
28

earnings for which the fair value option has been elected.  The objective of the Fair Value Option is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.

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

The following table describes the difference at the dates indicated between the aggregate fair value and the aggregate unpaid principal balance of loans held for investment at fair value:
(In Thousands)
Aggregate
Fair Value
Aggregate
Unpaid
Principal
Balance
Net
Unrealized
Loss
As of December 31, 2020:
     
Loans held for investment, at fair value
$
1,972
 
$
2,097
 
$
(125
)
       
As of June 30, 2020:
     
Loans held for investment, at fair value
$
2,258
 
$
2,369
 
$
(111
)

ASC 820-10-65-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provides additional guidance for estimating fair value in accordance with ASC 820, “Fair Value Measurements,” when the volume and level of activity for the asset or liability have significantly decreased.

ASC 820 establishes a three-level valuation hierarchy that prioritizes inputs to valuation techniques used in fair value calculations.  The three levels of inputs are defined as follows:

Level 1
-
Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.

Level 2
-
Observable inputs other than Level 1 such as: quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated to observable market data for substantially the full term of the asset or liability.

Level 3
-
Unobservable inputs for the asset or liability that use significant assumptions, including assumptions of risks.  These unobservable assumptions reflect the Corporation’s estimate of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include the use of pricing models, discounted cash flow models and similar techniques.
 
ASC 820 requires the Corporation to maximize the use of observable inputs and minimize the use of unobservable inputs.  If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation.

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

29

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

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

Non-performing loans are loans which are inadequately protected by the current sound net worth and paying capacity of the borrowers or of the collateral pledged.  The non-performing loans are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.  The fair value of a non-performing loan is determined based on an observable market price or current appraised value of the underlying collateral.  Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the borrower.  For non-performing loans which are restructured loans, the fair value is derived from discounted cash flow analysis (Level 3), except those which are in the process of foreclosure or 90 days delinquent for which the fair value is derived from the appraised value of its collateral (Level 2).  For other non-performing loans which are not restructured loans, other than non-performing commercial real estate loans, the fair value is derived from relative value analysis: historical experience and management estimates by loan type for which collectively evaluated allowances are assigned (Level 3); or the appraised value of its collateral for loans which are in the process of foreclosure or where borrowers file bankruptcy (Level 2).  For non-performing commercial real estate loans, the fair value is derived from the appraised value of its collateral (Level 2).  Non-performing loans are reviewed and evaluated on at least a quarterly basis for additional allowance and adjusted accordingly, based on the same factors identified above.  This loss is not recorded directly as an adjustment to current earnings or other comprehensive income (loss), but rather as a component in determining the overall adequacy of the allowance for loan losses.  These adjustments to the estimated fair value of non-performing loans may result in increases or decreases to the provision for loan losses recorded in current earnings.

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

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

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



30

The following fair value hierarchy tables present information at the dates indicated about the Corporation’s assets measured at fair value on a recurring basis:
 
Fair Value Measurement at December 31, 2020 Using:
(In Thousands)
Level 1
Level 2
Level 3
Total
Assets:
       
    Investment securities - available for sale:
       
        U.S. government agency MBS
$
 
$
2,551
 
$
 
$
2,551
 
        U.S. government sponsored enterprise MBS
 
1,434
 
 
1,434
 
        Private issue CMO
 
 
173
 
173