10-Q 1 prov10q33121.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
March 31, 2021

[     ]
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 April 30, 2021 there were 7,516,547 shares of the registrant's common stock, $0.01 par value per share, outstanding.



PROVIDENT FINANCIAL HOLDINGS, INC.
Table of Contents
PART 1  -
FINANCIAL INFORMATION
Page
       
ITEM 1  -
Financial Statements.  The Unaudited Interim Condensed Consolidated Financial Statements of
Provident Financial Holdings, Inc. filed as a part of the report are as follows:
 
       
 
Condensed Consolidated Statements of Financial Condition
 
   
as of March 31, 2021 and June 30, 2020
1
 
Condensed Consolidated Statements of Operations
 
   
for the Quarter and Nine Months Ended March 31, 2021 and 2020
2
 
Condensed Consolidated Statements of Comprehensive Income
 
   
for the Quarter and Nine Months Ended March 31, 2021 and 2020
3
 
Condensed Consolidated Statements of Stockholders’ Equity
 
   
for the Quarter and Nine Months Ended March 31, 2021 and 2020
4
 
Condensed Consolidated Statements of Cash Flows
 
   
for the Nine Months Ended March 31, 2021 and 2020
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
41
 
Safe-Harbor Statement
21
 
Critical Accounting Policies
43
 
Executive Summary and Operating Strategy
44
 
Off-Balance Sheet Financing Arrangements
46
 
Comparison of Financial Condition at March 31, 2021 and June 30, 2020
47
 
Comparison of Operating Results
for the Quarter and Nine Months Ended March 31, 2021 and 2020
48
 
Asset Quality
58
 
Loan Volume Activities
61
 
Liquidity and Capital Resources
61
 
Supplemental Information
63
       
ITEM 3  -
Quantitative and Qualitative Disclosures about Market Risk
64
       
ITEM 4  -
Controls and Procedures
68
       
PART II  -
OTHER INFORMATION
 
       
ITEM 1  -
Legal Proceedings
68
ITEM 1A -
Risk Factors
69
ITEM 2  -
Unregistered Sales of Equity Securities and Use of Proceeds
69
ITEM 3  -
Defaults Upon Senior Securities
69
ITEM 4  -
Mine Safety Disclosures
70
ITEM 5  -
Other Information
70
ITEM 6  -
Exhibits
70
       
SIGNATURES
71



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

 
March 31,
 2021
June 30,
 2020
Assets
   
     Cash and cash equivalents
$
71,629
 
$
116,034
 
     Investment securities – held to maturity, at cost
239,480
 
118,627
 
     Investment securities – available for sale, at fair value
3,802
 
4,717
   
     Loans held for investment, net of allowance for loan losses of
    $8,346 and $8,265, respectively; includes $1,879 and $2,258 at fair value, respectively
840,274
 
902,796
 
     Accrued interest receivable
3,060
 
3,271
 
     Federal Home Loan Bank (“FHLB”) – San Francisco stock
7,970
 
7,970
 
     Premises and equipment, net
9,608
 
10,254
 
     Prepaid expenses and other assets
13,473
 
13,168
 
   
   
            Total assets
$
1,189,296
 
$
 1,176,837
 
     
Liabilities and Stockholders’ Equity
   
     
Liabilities:
   
     Non interest-bearing deposits
$
124,043
 
$
118,771
 
     Interest-bearing deposits
809,713
 
774,198
 
            Total deposits
933,756
 
892,969
 
     
     Borrowings
111,000
 
141,047
 
     Accounts payable, accrued interest and other liabilities
18,790
 
18,845
 
            Total liabilities
1,063,546
 
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;
    18,226,615 and 18,097,615 shares issued; 7,516,547 and
    7,436,315 shares outstanding, respectively)
182
 
181
 
     Additional paid-in capital
97,323
 
95,593
 
     Retained earnings
195,443
 
194,345
 
     Treasury stock at cost (10,710,068 and 10,661,300 shares, respectively)
(167,276
)
(166,247
)
     Accumulated other comprehensive income, net of tax
78
 
104
 
     
            Total stockholders’ equity
125,750
 
123,976
 
     
            Total liabilities and stockholders’ equity
$
1,189,296
 
$
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
 March 31,
Nine Months Ended
 March 31,
 
2021
2020
2021
2020
Interest income:
       
     Loans receivable, net
$
7,860
 
$
9,622
 
$
25,121
 
$
30,017
 
     Investment securities
452
 
478
 
1,378
 
1,659
 
     FHLB – San Francisco stock
100
 
144
 
300
 
432
 
     Interest-earning deposits
18
 
186
 
59
 
621
 
     Total interest income
8,430
 
10,430
 
26,858
 
32,729
 
         
Interest expense:
       
     Checking and money market deposits
50
 
106
 
220
 
333
 
     Savings deposits
38
 
131
 
170
 
396
 
     Time deposits
292
 
509
 
1,009
 
1,571
 
     Borrowings
593
 
794
 
2,198
 
2,318
 
     Total interest expense
973
 
1,540
 
3,597
 
4,618
 
         
Net interest income
7,457
 
8,890
 
23,261
 
28,111
 
(Recovery) provision for loan losses
(200
)
874
 
59
 
671
 
Net interest income, after (recovery) provision for loan losses
7,657
 
8,016
 
23,202
 
27,440
 
         
Non-interest income:
       
     Loan servicing and other fees
355
 
131
 
880
 
631
 
     Deposit account fees
318
 
423
 
957
 
1,321
 
     Card and processing fees
366
 
360
 
1,098
 
1,121
 
     Other
160
 
187
 
397
 
442
 
     Total non-interest income
1,199
 
1,101
 
3,332
 
3,515
 
         
Non-interest expense:
       
     Salaries and employee benefits
4,241
 
4,966
 
12,985
 
14,950
 
     Premises and occupancy
863
 
845
 
2,631
 
2,603
 
     Equipment
312
 
314
 
860
 
855
 
     Professional expenses
367
 
351
 
1,183
 
1,090
 
     Sales and marketing expenses
130
 
177
 
470
 
506
 
     Deposit insurance premiums and regulatory assessments
154
 
54
 
429
 
97
 
     Other
842
 
798
 
2,252
 
2,196
 
     Total non-interest expense
6,909
 
7,505
 
20,810
 
22,297
 
         
Income before income taxes
1,947
 
1,612
 
5,724
 
8,658
 
Provision for income taxes
386
 
467
 
1,502
 
2,553
 
     Net income
$
1,561
 
$
1,145
 
$
4,222
 
$
6,105
 
         
Basic earnings per share
$
0.21
 
$
0.15
 
$
0.57
 
$
0.82
 
Diluted earnings per share
$
0.21
 
$
0.15
 
$
0.56
 
$
0.80
 
Cash dividends per share
$
0.14
 
$
0.14
 
$
0.42
 
$
0.42
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
2


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

 
For the Quarter Ended
 March 31,
For the Nine Months Ended
 March 31,
 
2021
2020
2021
2020
Net income
$
1,561
 
$
1,145
 
$
4,222
 
$
6,105
 
         
Change in unrealized holding loss on securities available for sale
(3
)
(94
)
(37
)
(133
)
Reclassification adjustment for net loss on securities available
  for sale included in net loss
 
 
 
 
Other comprehensive loss, before income taxes
(3
)
(94
)
(37
)
(133
)
         
Income tax benefit
(1
)
(28
)
(11
)
(39
)
Other comprehensive loss
(2
)
(66
)
(26
)
(94
)
         
Total comprehensive income
$
1,559
 
$
1,079
 
$
4,196
 
$
6,011
 










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


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

For the Quarter Ended March 31, 2021 and 2020:
 
Common
Stock
Additional
Paid-In
Retained
Treasury
Accumulated
Other
Comprehensive
Income (Loss),
   
 
Shares
Amount
 Capital  Earnings  Stock  Net of Tax
Total
 
Balance at December 31, 2020
7,442,254
 
$
181
 
$
96,164
 
$
194,923
 
$
(166,364
)
$
80
 
$
124,984
   
                 
Net income
     
1,561
     
1,561
   
Other comprehensive loss
         
(2
)
(2
)
 
Purchase of treasury stock
(54,707
)
     
(912
)
 
(912
)
 
Exercise of stock options
129,000
 
1
957
       
958
 
Amortization of restricted stock
   
190
       
190
   
Stock options expense
   
12
       
12
   
Cash dividends (1)
     
(1,041
)
   
(1,041
)
 
                 
Balance at March 31, 2021
7,516,547
 
$
182
 
$
97,323
 
$
195,443
 
$
(167,276
)
$
78
 
$
125,750
   

(1)
Cash dividends of $0.14 per share were paid in the quarter ended March 31, 2021.




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

(2)
Cash dividends of $0.14 per share were paid in the quarter ended March 31, 2020.




The accompanying notes are an integral part of these condensed consolidated financial statements.
4


For the Nine Months Ended March 31, 2021 and 2020:
 
Common
Stock
Additional
Paid-In
Retained
Treasury
Accumulated
Other
Comprehensive
Income (Loss),
 
 
Shares
Amount
 Capital  Earnings  Stock  Net of Tax
Total
Balance at June 30, 2020
7,436,315
 
$
181
 
$
95,593
 
$
194,345
 
$
(166,247
)
$
104
 
$
123,976
 
               
Net income
     
4,222
     
4,222
 
Other comprehensive loss
         
(26
)
(26
)
Purchase of treasury stock (1)
(57,768
)
     
(948
)
 
(948
)
Exercise of stock options
129,000
  1 957
        958
 
Distribution of restricted stock
9,000
                 
Forfeiture of restricted stock
           
81
         
(81
)
       
 
Amortization of restricted stock
   
631
       
631
 
Stock options expense
   
61
       
61
 
Cash dividends (2)
     
(3,124
)
   
(3,124
)
               
Balance at March 31, 2021
7,516,547
 
$
182
 
$
97,323
 
$
195,443
 
$
(167,276
)
$
78
 
$
125,750
 

(1)
Includes the purchase of 3,061 shares of distributed restricted stock in settlement of employee withholding tax obligations.
(2)
Cash dividends of $0.42 per share were paid in the nine months ended March 31, 2021.


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

 (1)   Cash dividends of $0.42 per share were paid in the nine months ended March 31, 2020.



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

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

 
Nine Months Ended
March 31,
 
2021
2020
Cash flows from operating activities:
   
     Net income
$
4,222
 
$
6,105
 
     Adjustments to reconcile net income to net cash provided by operating activities:
   
        Depreciation and amortization
4,537
 
2,347
 
        Provision for loan losses
59
 
671
 
        Stock-based compensation
692
 
717
 
        (Benefit) provision for deferred income taxes
(323
)
881
 
     Increase (decrease) in accounts payable, accrued interest and other liabilities
98
 
(4,291
)
     Increase in prepaid expenses and other assets
(260
)
(2,524
)
          Net cash provided by operating activities
9,025
 
3,906
 
     
Cash flows from investing activities:
   
     Decrease (increase) in loans held for investment, net
60,759
 
(35,676
)
     Maturity of investment securities held to maturity
800
 
 
     Principal payments from investment securities held to maturity
35,905
 
24,283
 
     Principal payments from investment securities available for sale
882
 
1,010
 
     Purchase of investment securities held to maturity
(158,983
)
 
     Purchase of premises and equipment
(225
)
(185
)
          Net cash used for investing activities
(60,862
)
(10,568
)
     
Cash flows from financing activities:
   
     Increase (decrease) in deposits, net
40,787
 
(5,440
)
     Repayments of short-term borrowings, net
(5,000
)
 
     Repayments of long-term borrowings
(25,047
)
(44
)
     Proceeds from long-term borrowings
 
30,007
 
     Exercise of stock options
958
 
215
 
     Withholding taxes on stock-based compensation
(194
)
(32
)
     Cash dividends
(3,124
)
(3,142
)
     Treasury stock purchases
(948
)
(1,284
)
          Net cash provided by financing activities
7,432
 
20,280
 
     
Net (decrease) increase in cash and cash equivalents
(44,405
)
13,618
 
     Cash and cash equivalents at beginning of period
116,034
 
70,632
 
     Cash and cash equivalents at end of period
$
71,629
 
$
84,250
 
     Supplemental information:
   
Cash paid for interest
$
3,700
 
$
4,625
 
Cash paid for income taxes
$
2,970
 
$
775
 
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

March 31, 2021

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 nine months ended March 31, 2021 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.

ASU 2020-04:
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform.. The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract re-measurement or reassessment of a previous accounting determination. In January 2021, ASU 2021-01 clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. These ASUs are effective for all entities as of March 12, 2020 through December 31, 2022. The Corporation is in the process of compiling data on the potential impact of reference rate reform and has not determined if it will adopt the ASU or the related impact of the adoption of this ASU on its condensed consolidated financial statements.

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 March 31, 2021, there were outstanding options to purchase 420,000 shares with a weighted average strike price of $16.16 per share, of which 330,000 shares with a weighted average strike price of $15.06 per share were exercisable. In comparison, there were outstanding options to purchase 554,500 shares with a weighted average strike price of $14.07 per share at March 31, 2020, of which 451,500 shares with a weighted average strike price of $12.70 per share were exercisable. As of March 31, 2021 and 2020, 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 nine months ended March 31, 2021 and 2020, respectively.
 
For the Quarter Ended
March 31,
For the Nine Months Ended
March 31,
(In Thousands, Except Earnings Per Share)
2021
2020
2021
2020
Numerator:
       
     Net income – numerator for basic earnings per share and 
       diluted earnings per share - available to common
       stockholders
$
1,561
 
$
1,145
 
$
4,222
 
$
6,105
 
         
Denominator:
       
     Denominator for basic earnings per share:
       
        Weighted-average shares
7,463
 
7,469
 
7,447
 
7,478
 
         
     Effect of dilutive shares:
       
        Stock options
70
 
71
 
54
 
87
 
        Restricted stock
47
 
50
 
20
 
41
 
         
     Denominator for diluted earnings per share:
       
        Adjusted weighted-average shares and assumed
          conversions
7,580
 
7,590
 
7,521
 
7,606
 
         
Basic earnings per share
$
0.21
 
$
0.15
 
$
0.57
 
$
0.82
 
Diluted earnings per share
$
0.21
 
$
0.15
 
$
0.56
 
$
0.80
 



8

Note 4: Investment Securities

The amortized cost and estimated fair value of investment securities as of March 31, 2021 and June 30, 2020 were as follows:

March 31, 2021
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)
$
236,603
 
$
2,019
 
$
(1,972
)
$
236,650
 
$
236,603
 
   U.S. SBA securities (2)
1,877
 
 
(17
)
1,860
 
1,877
 
   Certificate of deposits
1,000
 
 
 
1,000
 
1,000
 
Total investment securities - held to maturity
$
239,480
 
$
2,019
 
$
(1,989
)
$
239,510
 
$
239,480
 
           
Available for sale:
         
   U.S. government agency MBS
$
2,275
 
$
85
 
$
 
$
2,360
 
$
2,360
 
   U.S. government sponsored enterprise MBS
1,266
 
13
 
 
1,279
 
1,279
 
   Private issue CMO (3)
162
 
1
 
 
163
 
163
 
Total investment securities - available for sale
$
3,703
 
$
99
 
$
 
$
3,802
 
$
3,802
 
Total investment securities
$
243,183
 
$
2,118
 
$
(1,989
)
$
243,312
 
$
243,282
 

(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 third quarter of fiscal 2021 and 2020, the Corporation received MBS principal payments of $15.0 million and $7.9 million, respectively, and there were no sales of investment securities during these periods. The Corporation purchased $51.6 million of U.S. government sponsored enterprise MBS to be held to maturity in the third quarter of fiscal 2021 but did not purchase any investment securities in the third quarter of fiscal 2020.


9

For the first nine months of fiscal 2021 and 2020, the Corporation received MBS principal payments of $36.8 million and $25.3 million, respectively, and there were no sales of investment securities during these periods. The Corporation purchased $158.0 million of U.S. government sponsored enterprise MBS to be held to maturity in the first nine 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 $2.0 million at March 31, 2021 and $69,000 at June 30, 2020.
As of March 31, 2021
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
$
158,588
 
$
1,972
   
$
 
$
   
$
158,588
 
$
1,972
 
   U.S. SBA securities
 
 
$
     
1,860
   
17
     
1,860
   
17
 
Total investment securities – held to maturity
$
158,588
 
$
1,972
   
$
1,860
 
$
17
   
$
160,448
 
$
1,989
 
                                         
Available for sale:
                                       
Total investment securities – available for sale
$
 
$
   
$
 
$
   
$
 
$
 
Total investment securities
$
158,588
 
$
1,972
   
$
1,860
 
$
17
   
$
160,448
 
$
1,989
 


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 March 31, 2021, $17,000 of the $2.0 million of unrealized holding losses were 12 months or more; while at June 30, 2020, $17,000 of the $69,000 of 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 March 31, 2021 and 2020, the Corporation did not have any investment securities with the intent to sell and determined it was more likely than not that the Corporation would not be required to sell the securities prior to recovery of the amortized cost basis; therefore, no impairment losses were recorded for the quarter ended March 31, 2021 and 2020.

10

Contractual maturities of investment securities as of March 31, 2021 and June 30, 2020 were as follows:
 
March 31, 2021
 
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
17,581
 
18,323
   
19,389
 
20,194
 
Due after five through ten years
97,910
 
98,513
   
50,895
 
52,315
 
Due after ten years
122,989
 
121,674
   
47,543
 
47,892
 
Total investment securities - held to maturity
$
239,480
 
$
239,510
   
$
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
3,703
 
3,802
   
4,583
 
4,717
 
Total investment securities - available for sale
$
3,703
 
$
3,802
   
$
4,583
 
$
4,717
 
Total investment securities
$
243,183
 
$
243,312
   
$
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)
March 31,
2021
June 30,
2020
Mortgage loans:
   
     Single-family
$
254,393
 
$
298,810
 
     Multi-family
 483,283
 
491,903
 
     Commercial real estate
 99,722
 
105,235
 
     Construction (1)
 3,508
 
7,801
 
     Other
 140
 
143
 
Commercial business loans (2)
 851
 
480
 
Consumer loans (3)
 96
 
94
 
     Total loans held for investment, gross
841,993
 
904,466
 
     
Advance payments of escrows
339
 
68
 
Deferred loan costs, net
6,288
 
6,527
 
Allowance for loan losses
(8,346
)
(8,265
)
     Total loans held for investment, net
$
840,274
 
$
902,796
 

(1)
Net of $1.7 million and $4.0 million of undisbursed loan funds as of March 31, 2021 and June 30, 2020, respectively.
(2)
Net of $520 thousand and $935 thousand of undisbursed lines of credit as of March 31, 2021 and June 30, 2020, respectively.
(3)
Net of $426 thousand and $448 thousand of undisbursed lines of credit as of March 31, 2021 and June 30, 2020, respectively.

The following table sets forth information at March 31, 2021 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 three percent of loans held for investment at March 31, 2021 as compared to one percent at 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
$
66,406
 
$
45,305
 
$
45,213
 
$
77,966
 
$
19,503
 
$
254,393
 
     Multi-family
167,295
 
142,775
 
152,658
 
20,325
 
230
 
483,283
 
     Commercial real estate
46,486
 
32,464
 
20,591
 
 
181
 
99,722
 
     Construction
2,645
 
 
 
 
863
 
3,508
 
     Other
 
 
 
 
140
 
140
 
Commercial business loans
500
 
 
 
 
351
 
851
 
Consumer loans
96
 
 
 
 
 
96
 
     Total loans held for investment,
        gross
$
283,428
 
$
220,544
 
$
218,462
 
$
98,291
 
$
21,268
 
$
841,993
 


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 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:
   
March 31, 2021
(In Thousands)
Single-
family
Multi-
family
Commercial
Real Estate
Construction
Other
Mortgage
Commercial Business
Consumer
Total
                   
Pass
$
243,046
 
$
481,420
 
$
99,722
 
$
3,508
 
$
140
 
$
851
 
$
96
 
$
828,783
 
Special Mention
1,752
 
737
 
 
   
 
 
 
2,489
 
Substandard
9,595
 
1,126
 
 
   
 
 
 
10,721
 
 
Total loans held for
   investment, gross
$
254,393
 
$
483,283
 
$
99,722
 
$
3,508
 
$
140
 
$
851
 
$
96
 
$
841,993
 



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 economic environment during the past 12 months, the qualitative component has been increased in the allowance for loan losses methodology reflecting the poorer economic environment. However, an improved economic outlook that has developed in the quarter ended March 31, 2021 may reduce the forecasted impact of the pandemic on the credit quality of the loan portfolio in future quarters.

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
March 31,
For the Nine Months Ended
March 31,
(Dollars in Thousands)
2021
2020
2021
2020
         
Allowance at beginning of period
$
8,538
 
$
6,921
 
$
8,265
 
$
7,076
 
         
(Recovery) provision for loan losses
(200
)
874
 
59
 
671
 
         
Recoveries:
       
Mortgage loans:
       
        Single-family
9
 
14
 
23
 
63
 
Consumer loans
 
1
 
1
 
2
 
     Total recoveries
9
 
15
 
24
 
65
 
         
Charge-offs:
       
Mortgage loans:
       
        Single-family
 
 
 
(1
)
Consumer loans
(1
)
 
(2
)
(1
)
     Total charge-offs
(1
)
 
(2
)
(2
)
         
     Net recoveries (charge-offs)
8
 
15
 
22
 
63
 
        Balance at end of period
$
8,346
 
$
7,810
 
$
8,346
 
$
7,810
 
         
Allowance for loan losses as a percentage of gross
  loans held for investment at the end of the period
0.98
%
0.85
%
0.98
%
0.85
%
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.
   
March 31, 2021
(In Thousands)
Current
30-89 Days
Past Due
Non-Accrual (1)
Total Loans Held for
Investment, Gross
           
Mortgage loans:
       
 
Single-family
$
244,798
 
$
 
$
9,595
 
$
254,393
 
 
Multi-family
482,157
 
 
1,126
 
483,283
 
 
Commercial real estate
99,722
 
 
 
99,722
 
 
Construction
3,508
 
 
 
3,508
 
 
Other
140
 
 
 
140
 
Commercial business loans
851
 
 
 
851
 
Consumer loans
96
 
 
 
96
 
 
Total loans held for investment, gross
$
831,272
 
$
 
$
10,721
 
$
841,993
 

(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 March 31, 2021
(In Thousands)
Single-
family
Multi-
family
Commercial
Real Estate
Construction
 
Other
 
Commercial Business
Consumer
Total
Allowance for loan losses:
                   
Allowance at beginning of  period
$
2,706
 
$
4,540
 
$
1,132
 
$
110
 
$
3
 
$
41
 
$
6
 
$
8,538
   
(Recovery) provision for loan losses
(311
)
202
 
(30
)
(57
)
 
 
(5
)
1
 
(200
)
 
Recoveries
9
 
 
 
   
 
 
 
9
   
Charge-offs
 
 
 
   
 
 
(1
)
(1
)
 
 
Allowance for loan losses,
  end of period
$
2,404
 
$
4,742
 
$
1,102
 
$
53
 
$
3
 
$
36
 
$
6
 
$
8,346
   
                       
Allowance for loan losses:
                   
Individually evaluated for impairment
$
572
 
$
 
$
 
$
 
$
 
$
 
$
 
$
572
   
Collectively evaluated for impairment
1,832
 
4,742
 
1,102
 
53
   
3
 
36
 
6
 
7,774
   
 
Allowance for loan losses,
  end of period
$
2,404
 
$
4,742
 
$
1,102
 
$
53
 
$
3
 
$
36
 
$
6
 
$
8,346
   
                       
Loans held for investment:
                   
Individually evaluated for impairment
$
9,343
 
$
 
$
 
$
 
$
 
$
 
$
 
$
9,343
   
Collectively evaluated for impairment
245,050
 
483,283
 
99,722
 
3,508
   
140
 
851
 
96
 
832,650
   
 
Total loans held for investment,
  gross
$
254,393
 
$
483,283
 
$
99,722
 
$
3,508
 
$
140
 
$
851
 
$
96
 
$
841,993
   
Allowance for loan losses as
  a percentage of gross loans
  held for investment
  0.94
%
  0.98
%
  1.11
%
  1.51
%
  2.14
%
  4.23
%
  6.25
%
  0.98
%
 





17

   
Quarter Ended March 31, 2020
(In Thousands)
Single-
family
Multi-
family
Commercial
Real Estate
Construction
 
Commercial
Business
Consumer
Total
Allowance for loan losses:
               
Allowance at beginning of period
$
2,157

$
3,502

$
1,058

$
168

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





18

   
Nine Months Ended March 31, 2021
(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
   
(Recovery) provision for loan losses
(241
)
413
 
(8
)
(118
)
 
 
12
 
1
 
59
   
Recoveries
23
 
 
 
   
 
 
1
 
24
   
Charge-offs
 
 
 
   
 
 
(2
)
(2
)
 
 
Allowance for loan losses,
  end of period
$
2,404
 
$
4,742
 
$
1,102
 
$
53
 
$
3
 
$
36
 
$
6
 
$
8,346
   
                       
Allowance for loan losses:
                   
Individually evaluated for impairment
$
572
 
$
 
$
 
$
 
$
 
$
 
$
 
$
572
   
Collectively evaluated for impairment
1,832
 
4,742
 
1,102
 
53
   
3
 
36
 
6
 
7,774
   
 
Allowance for loan losses,
  end of period
$
2,404
 
$
4,742
 
$
1,102
 
$
53
 
$
3
 
$
36
 
$
6
 
$
8,346
   
                       
Loans held for investment:
                   
Individually evaluated for impairment
$
9,343
 
$
 
$
 
$
 
$
 
$
 
$
 
$
9,343
   
Collectively evaluated for impairment
245,050
 
483,283
 
99,722
 
3,508
   
140
 
851
 
96
 
832,650
   
 
Total loans held for investment,
  gross
$
254,393
 
$
483,283
 
$
99,722
 
$
3,508
 
$
140
 
$
851
 
$
96
 
$
841,993
   
Allowance for loan losses as
  a percentage of gross loans
  held for investment
  0.94
%
  0.98
%
  1.11
%
  1.51
%
  2.14
%
  4.23
%
  6.25
%
  0.98
%
 




19

   
Nine Months Ended March 31, 2020
(In Thousands)
Single-
family
Multi-
family
Commercial
Real Estate
Construction
 
Other
 
Commercial
Business
Consumer
Total
Allowance for loan losses:
                   
Allowance at beginning of period
$
2,709
 
$
3,219
 
$
1,050
 
$
61
 
$
3
 
$
26
 
$
8
 
$
7,076
 
(Recovery) provision for loan losses
(169
)
739
 
11
 
95
   
(3
)
 
(2
)
671
 
Recoveries
63
 
 
 
   
 
 
2
 
65
 
Charge-offs
(1
)
 
 
   
 
 
(1
)
(2
)
 
Allowance for loan losses,
  end of period
$
2,602
 
$
3,958
 
$
1,061
 
$
156
 
$
 
$
26
 
$
7
 
$
7,810
 
                       
Allowance for loan losses:
                   
Individually evaluated for impairment
$
45
 
$
 
$
 
$
 
$
 
$
6
 
$
 
$
51
 
Collectively evaluated for impairment
2,557
 
3,958
 
1,061
 
156
   
 
20
 
7
 
7,759
 
 
Allowance for loan losses,
  end of period
$
2,602
 
$
3,958
 
$
1,061
 
$
156
 
$
 
$
26
 
$
7
 
$
7,810
 
                       
Loans held for investment:
                   
Individually evaluated for impairment
$
2,698
 
$
 
$
 
$
 
$
 
$
40
 
$
 
$
2,738
 
Collectively evaluated for impairment
323,988
 
475,941
 
105,691
 
6,346
   
 
462
 
122
 
912,550
 
 
Total loans held for investment,
  gross
$
326,686
 
$
475,941
 
$
105,691
 
$
6,346
 
$
 
$
502
 
$
122
 
$
915,288
 
Allowance for loan losses as
  a percentage of gross loans
  held for investment
  0.80
%
  0.83
%
  1.00
%
  2.46
%
 
%
  5.18
%
  5.74
%
  0.85
%






20

The following tables identify the Corporation’s total recorded investment in non-performing loans by type at the dates and for the periods indicated.  Generally, a loan is placed on non-accrual status when it becomes 90 days past due as to principal or interest or if the loan is deemed impaired, after considering economic and business conditions and collection efforts, where the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful.  In addition, interest income is not recognized on any loan where management has determined that collection is not reasonably assured.  A non-performing loan may be restored to accrual status when delinquent principal and interest payments are brought current, the borrower(s) has demonstrated sustained payment performance and future monthly principal and interest payments are expected to be collected on a timely basis.  Loans with a related allowance reserve have been individually evaluated for impairment using either a discounted cash flow analysis or, for collateral dependent loans, current appraisals less costs to sell, to establish realizable value.  This analysis may identify a specific impairment amount needed or may conclude that no reserve is needed.  Loans that are not individually evaluated for impairment are included in pools of homogeneous loans for evaluation of related allowance reserves.
     
At March 31, 2021
     
Unpaid
     
Net
     
Principal
Related
Recorded
 
Recorded
(In Thousands)
Balance
Charge-offs
Investment
Allowance (1)
Investment
               
Mortgage loans:
         
 
Single-family:
         
   
With a related allowance
$
8,305
 
$
 
$
8,305
 
$
(622
)
$
7,683
 
   
Without a related allowance (2)
1,734
 
(444
)
1,290
 
 
1,290
 
 
Total single-family
10,039
 
(444
)
9,595
 
(622
)
8,973
 
               
 
Multi-family:
         
   
With a related allowance
 
1,126
   
   
1,126
   
(340
)
 
786
 
 
Total multi-family
1,126
 
 
1,126
 
(340
)
786
 
               
Total non-performing loans
$
11,165
 
$
(444
)
$
10,721
 
$
(962
)
$
9,759
 

(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 March 31, 2021, there were no commitments to lend additional funds to those borrowers whose loans were classified as non-performing.

For the quarter ended March 31, 2021 and 2020, the Corporation’s average recorded investment in non-performing loans was $10.8 million and $3.9 million, respectively.  The Corporation records payments on non-performing loans utilizing the cash basis or cost recovery method of accounting during the periods when the loans are on non-performing status. For the quarter ended March 31, 2021, the Bank received $47,000 in interest payments from non-performing loans, of which $31,000 was recognized as interest income and the remaining $16,000 was applied to reduce the loan balances under the cost recovery method.  In comparison, for the quarter ended March 31, 2020, the Bank received $71,000 in interest payments from non-performing loans, of which $29,000 was recognized as interest income and the remaining $42,000 was applied to reduce the loan balances under the cost recovery method.

For the nine months ended March 31, 2021 and 2020, the Corporation’s average recorded investment in non-performing loans was $8.7 million and $4.4 million, respectively.  For the nine months ended March 31, 2021, the Bank received $140,000 in interest payments from non-performing loans, of which $101,000 was recognized as interest income and the remaining $39,000 was applied to reduce the loan balances under the cost recovery method.  In comparison, for the nine months ended March 31, 2020, 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 nine months ended March 31, 2021 and 2020:
     
Quarter Ended March 31,
     
2021
 
2020
     
Average
Interest
 
Average
Interest
     
Recorded
Income
 
Recorded
Income
(In Thousands)
Investment
Recognized
 
Investment
Recognized
               
Without related allowances:
         
 
Mortgage loans:
         
   
Single-family
$
1,461
 
$
   
$
2,282
 
$
8
 
     
1,461
 
   
2,282
 
8
 
               
With related allowances:
         
 
Mortgage loans:
         
   
Single-family
8,975
 
27
   
1,569
 
20
 
   
Multi-family
375
 
4
   
 
 
 
Commercial business loans
 
   
40
 
1
 
   
9,350
 
31
   
1,609
 
21
 
             
 
Total
$
10,811
 
$
31
   
$
3,891
 
$
29
 


     
Nine Months Ended March 31,
     
2021
 
2020
     
Average
Interest
 
Average
Interest
     
Recorded
Income
 
Recorded
Income
(In Thousands)
Investment
Recognized
 
Investment
Recognized
               
Without related allowances:
         
 
Mortgage loans:
         
   
Single-family
$
1,638
 
$
   
$
2,747
 
$
119
 
   
Construction
 
   
361
 
20
 
     
1,638
 
   
3,108
 
139
 
               
With related allowances:
         
 
Mortgage loans:
         
   
Single-family
6,923
 
96
   
1,291
 
44
 
   
Multi-family
125
 
4
   
 
 
 
Commercial business loans
17
 
1
   
43
 
3
 
   
7,065
 
101
   
1,334
 
47
 
             
 
Total
$
8,703
 
$
101
   
$
4,442
 
$
186
 

The Corporation has modified loans in accordance with the Coronavirus Aid, Relief, and Economic Security Act for 2020, as amended (“CARES Act”) and Revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (“Interagency Statement”). The CARES Act and Interagency Statement

23

provided guidance around the modification of loans as a result of the COVID-19 pandemic, and outlined, among other criteria, that short-term modifications of up to six months made on a good faith basis to borrowers who were current as defined under the CARES Act and Interagency Statement prior to any relief are not restructured loans and if all payments are current in accordance with the revised terms of the loan, the loan would not be reported as past due. As of March 31, 2021, the Corporation had seven forbearance loans with a total outstanding balance of $3.1 million or 0.37 percent of total loans that were modified and operating under forbearance agreements in accordance with the CARES Act and Interagency Statement. As of March 31, 2021, the Corporation had no pending requests for payment relief.

As of March 31, 2021, 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
 
59
 
$
23,741
   
54
 
$
21,900
   
5
 
$
1,841
 
Multi-family loans
 
5
   
2,334
   
4
   
2,026
   
1
   
308
 
Commercial real estate loans
 
3
   
2,005
   
2
   
1,060
   
1
   
945
 
Total loan forbearance
 
67
 
$
28,080
   
60
 
$
24,986
   
7
 
$
3,094
 

(1)
Includes 17 single-family loans totaling $6.7 million which were subsequently extended and classified as restructured non-performing loans, consistent with the Interagency Statement.

As of March 31, 2021, 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
 
5
 
$
1,841
 
0.22
%
 
69
%
 
715
   
N/A
   
7.9
 
Multi-family loan
 
1
   
308
 
0.04
%
 
50
%
 
747
   
1.16
x
 
5.0
 
Commercial real estate loan
 
1
   
945
 
0.11
%
 
48
%
 
704
   
1.71
x
 
4.0
 
Total loans in forbearance
 
7
 
$
3,094
 
0.37
%
 
61
%
 
715
   
1.57
x
 
6.4
 

(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.

For additional detail, see the “COVID-19 Impact to the Corporation” section in Management’s Discussion and Analysis of Financial Condition and Results of Operation in this Form 10-Q.

For the quarter ended March 31, 2021, one loan was newly restructured (a forbearance loan which was downgraded when its 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 quarter ended March 31, 2020, no new loans were restructured from their original terms and classified as restructured loans and no restructured loans were upgraded or downgraded. During both quarters ended March 31, 2021 and 2020, no restructured loans were in default within a 12-month period subsequent to their original restructuring. Additionally, during the quarter ended March 31, 2021, there were nine loans totaling $3.4 million whose modification were extended beyond the initial maturity of the modification. During the quarter ended March 31, 2020, there were no loans whose modification were extended beyond the initial maturity of the modification. At both March 31, 2021 and June 30, 2020, there were no commitments to lend additional funds to those borrowers whose loans were restructured.

24

For the nine months ended March 31, 2021, 18 loans were newly restructured (including 17 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 three restructured loans were upgraded to the pass category, of which one loan was subsequently paid off. For the nine months ended March 31, 2020, no new loans were restructured from their original terms and classified as restructured loans, while two substandard restructured loans were paid 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 nine months ended March 31, 2021 and 2020, no restructured loans were in default within a 12-month period subsequent to their original restructuring. Additionally, during the nine months ended March 31, 2021, there were nine loans totaling $3.4 million whose modification were extended beyond the initial maturity of the modification. During the nine months ended March 31, 2020, there were no loans whose modification were extended beyond the initial maturity of the modification.

As of March 31, 2021, the Corporation held 23 restructured loans with a net outstanding balance of $8.3 million, of which $8.1 million 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 March 31, 2021, 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.




25

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)
March 31, 2021
June 30, 2020
Restructured loans on non-accrual status:
   
     Mortgage loans:
   
        Single-family
$
8,077
 
$
2,612
 
     Commercial business loans
 
31
 
        Total
8,077
 
2,643
 
     
Restructured loans on accrual status:
   
     Mortgage loans:
   
        Single-family
 
246
   
 
        Total
246
 
 
        Total restructured loans
$
8,323
 
$
2,643
 

The following tables identify the Corporation’s total recorded investment in restructured loans by type at the dates and for the periods indicated.
     
At March 31, 2021
     
Unpaid
     
Net
     
Principal
Related
Recorded
 
Recorded
(In Thousands)
Balance
Charge-offs
Investment
Allowance (1)
Investment
               
Mortgage loans:
         
 
Single-family:
         
   
With a related allowance
$
8,053
 
$
 
$
8,053
 
$
(572
)
$
7,481
 
   
Without a related allowance (2)
1,207
 
(365
)
842
 
 
842
 
 
Total single-family
9,260
 
(365
)
8,895
 
(572
)
8,323
 
               
Total restructured loans
$
9,260
 
$
(365
)
$
8,895
 
$
(572
)
$
8,323
 

(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.


26

     
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 nine months ended March 31, 2021 and 2020, no properties were acquired in the settlement of loans and no previously foreclosed upon properties were sold. As of both March 31, 2021 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.

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

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit in the form of originating loans or providing funds under existing lines of credit, loan sale commitments to third parties and option contracts.  These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the accompanying Condensed Consolidated Statements of Financial Condition.  The Corporation’s exposure to credit loss, in the event of non-performance by the counterparty to these financial instruments, is represented by the contractual amount of these instruments.  The Corporation uses the same credit policies in entering into financial instruments with off-balance sheet risk as it does for on-balance sheet instruments.  As of March 31, 2021 and June 30, 2020, the Corporation had commitments to extend credit on loans to be held for investment of $37.8 million and $13.6 million, respectively.


27

The following table provides information at the dates indicated regarding undisbursed funds on construction loans, undisbursed funds to borrowers on existing lines of credit with the Corporation as well as commitments to originate loans to be held for investment at the dates indicated below.
Commitments
March 31, 2021
June 30, 2020
(In Thousands)
   
     
Undisbursed loan funds – Construction loans
$
1,718
 
$
4,029
 
Undisbursed lines of credit – Commercial business loans
520
 
935
 
Undisbursed lines of credit – Consumer loans
426
 
448
 
Commitments to extend credit on loans to be held for investment
37,835
 
13,579
 
Total
$
40,499
 
$
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 and nine months ended March 31, 2021 and 2020.
 
For the Quarter Ended
 March 31,
For the Nine Months Ended
March 31,
(In Thousands)
2021
2020
2021
2020
Balance, beginning of the period
$
101
 
$
138
 
$
126
 
$
141
 
Provision (recovery)
56
 
(47
)
31
 
(50
)
Balance, end of the period
$
157
 
$
91
 
$
157
 
$
91
 

In accordance with ASC 815, “Derivatives and Hedging,” and interpretations of the Derivatives Implementation Group of the FASB, the fair value of the commitments to extend credit on loans to be held for sale, loan sale commitments, to be announced (“TBA”) MBS trades, put option contracts and call option contracts are recorded at fair value on the Condensed Consolidated Statements of Financial Condition. The Corporation does not apply hedge accounting to its derivative financial instruments; therefore, all changes in fair value are recorded in earnings. As of March 31, 2021 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 March 31, 2021 and June 30, 2020, the Bank serviced $5.6 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 March 31, 2021 and 2020 the Bank did not repurchase any loans. Also, during the nine months ended March 31, 2021, 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 other repurchase requests that did not result in the repurchase of the loan itself, which were settled for a total of $175,000 in the quarter and nine months ended March 31, 2021. This compares to the quarter and nine months ended March 31, 2020 where there were no repurchase requests that resulted in the repurchase of the loan itself. In addition to the specific recourse liability for the MPF program, the Bank established a recourse liability of $175,000 and $200,000 for loans sold to other investors as of March 31, 2021 and June 30, 2020, respectively.

28


The following table shows the summary of the recourse liability for the quarter and nine months ended March 31, 2021 and 2020:
 
For the Quarter Ended
March 31,
 For the Nine Months Ended
March31,
Recourse Liability
2021
2020
2021
2020
(In Thousands)
       
         
Balance, beginning of the period
$
390
 
$
250
 
$
270
 
$
250
 
Provision for recourse liability
 
 
120
 
 
Net settlements in lieu of loan repurchases
(175
)
 
(175
)
 
Balance, end of the period
$
215
 
$
250
 
$
215
 
$
250
 

Note 7: Fair Value of Financial Instruments

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

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

The following table describes the difference at the dates indicated between the aggregate fair value and the aggregate unpaid principal balance of loans held for investment at fair value:
(In Thousands)
Aggregate
Fair Value
Aggregate
Unpaid
Principal
Balance
Net
Unrealized
Loss
As of March 31, 2021:
     
Loans held for investment, at fair value
$
1,879
 
$
1,948
 
$
(69
)
       
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.


29

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

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

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

Level 3
-
Unobservable inputs for the asset or liability that use significant assumptions, including assumptions of risks.  These unobservable assumptions reflect the Corporation’s estimate of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include the use of pricing models, discounted cash flow models and similar techniques.

ASC 820 requires the Corporation to maximize the use of observable inputs and minimize the use of unobservable inputs.  If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation.

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

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

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

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

30

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

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

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

The following fair value hierarchy tables present information at the dates indicated about the Corporation’s assets measured at fair value on a recurring basis:
 
Fair Value Measurement at March 31, 2021 Using:
(In Thousands)
Level 1
Level 2
Level 3
Total
Assets:
       
     Investment securities - available for sale:
       
          U.S. government agency MBS
$
 
$
2,360
 
$
 
$
2,360
 
          U.S. government sponsored enterprise MBS
 
1,279
 
&