PROVIDENT FINANCIAL HOLDINGS INC 10-Q

ITEM 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations General Provident Financial Holdings, Inc., a Delaware corporation, was organized in January 1996 for the purpose of becoming the holding company of Provident Savings Bank, F.S.B. ("the Bank") upon the Bank’s conversion from a federal mutual to a federal stock savings bank (“Conversion”). The Conversion was completed on June 27, 1996. The Corporation is regulated by the Federal Reserve Board (“FRB”). At March 31, 2020, the Corporation had total assets of $1.11 billion, total deposits of $835.8 million and total stockholders’ equity of $123.2 million. The Corporation has not engaged in any significant activity other than holding the stock of the Bank. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank and its subsidiaries. As used in this report, the terms “we,” “our,” “us,” and “Corporation” refer to Provident Financial Holdings, Inc. and its consolidated subsidiaries, unless the context indicates otherwise. The Bank, founded in 1956, is a federally chartered stock savings bank headquartered in Riverside, California. The Bank is regulated by the Office of the Comptroller of the Currency (“OCC”), its primary federal regulator, and the Federal Deposit Insurance Corporation (“FDIC”), the insurer of its deposits. The Bank’s deposits are federally insured up to applicable limits by the FDIC. The Bank has been a member of the Federal Home Loan Bank System since 1956. The Corporation operates in a single business segment through the Bank. The Bank's activities include attracting deposits, offering banking services and originating and purchasing single-family, multi-family, commercial real estate, construction and, to a lesser extent, other mortgage, commercial business and consumer loans. Deposits are collected primarily from 13 banking locations located in Riverside and San Bernardino counties in California. Loans are primarily originated and purchased in Southern and Northern California. There are various risks inherent in the Corporation’s business including, among others, the 42 general business environment, interest rates, the California real estate market, the demand for loans, the prepayment of loans, the repurchase of loans previously sold to investors, the secondary market conditions to buy and sell loans, competitive conditions, legislative and regulatory changes, fraud and other risks. The Corporation began to distribute quarterly cash dividends in the quarter ended September 30, 2002. On January 28, 2020, the Corporation declared a quarterly cash dividend of $0.14 per share for the Corporation’s shareholders of record at the close of business on February 18, 2020, which was paid on March 10, 2020. Future declarations or payments of dividends will be subject to the consideration of the Corporation’s Board of Directors, which will take into account the Corporation’s financial condition, results of operations, tax considerations, capital requirements, industry standards, legal restrictions, economic conditions and other factors, including the regulatory restrictions which affect the payment of dividends by the Bank to the Corporation. Under Delaware law, dividends may be paid either out of surplus or, if there is no surplus, out of net profits for the current fiscal year and/or the preceding fiscal year in which the dividend is declared. On April 30, 2020, the Corporation announced that the Corporation’s Board of Directors declared a quarterly cash dividend of $0.14 per share. Shareholders of the Corporation’s common stock at the close of business on May 21, 2020 will be entitled to receive the cash dividend. The cash dividend will be payable on June 11, 2020. Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding the financial condition and results of operations of the Corporation. The information contained in this section should be read in conjunction with the Unaudited Interim Condensed Consolidated Financial Statements and accompanying selected Notes to Unaudited Interim Condensed Consolidated Financial Statements. Safe-Harbor Statement Certain matters in this Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This Form 10-Q contains statements that the Corporation believes are “forward-looking statements.” These statements relate to the Corporation’s financial condition, liquidity, results of operations, plans, objectives, future performance or business. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements the Corporation may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Corporation. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors which could cause actual results to differ materially include, but are not limited to the following: the effect of the novel coronavirus of 2019 (“COVID-19”) pandemic, including on the Corporation’s credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity; the credit risks of lending activities, including changes in the level and trend of loan delinquencies and charge-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the residential and commercial real estate markets and may lead to increased losses and non-performing assets and may result in our allowance for loan losses not being adequate to cover actual losses and require us to materially increase our reserve; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; uncertainty regarding the future of the London Interbank Offered Rate ("LIBOR"), and the potential transition away from LIBOR toward new interest rate benchmarks; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to purchase and sell loans in the secondary market; results of examinations of the Corporation by the FRB or of the Bank by the OCC or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to enter into a formal enforcement action or to increase our allowance for loan losses, write-down assets, change our regulatory capital 43 position or affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements and restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules, including as a result of Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, California Consumer Privacy Act and the implementing regulations; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; our ability to implement our branch expansion strategy; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired or may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; our ability to manage loan delinquency rates; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common stock; adverse changes in the securities markets; the inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; war or terrorist activities; and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services including the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") and other risks detailed in this report and in the Corporation’s other reports filed with or furnished to the SEC. These developments could have an adverse impact on our financial position and our results of operations. Forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking statements included in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur, and you should not put undue reliance on any forward-looking statements. Critical Accounting Policies The discussion and analysis of the Corporation’s financial condition and results of operations is based upon the Corporation’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions. The Corporation's critical accounting policies are described in the Corporation’s 2019 Annual Report on Form 10-K for the year ended June 30, 2019 in the Critical Accounting Policies section of Management's Discussion and Analysis of Financial Condition and Results of Operations and in Note 1 - Organization and Significant Accounting Policies. There have been no significant changes during the nine months ended March 31, 2020 to the critical accounting policies as described in the Corporation’s 2019 Annual Report on Form 10-K for the period ended June 30, 2019. 44 Executive Summary and Operating Strategy Provident Savings Bank, F.S.B., established in 1956, is a financial services company committed to serving consumers and small to mid-sized businesses in the Inland Empire region of Southern California. The Bank conducts its business operations as Provident Bank and through its subsidiary, Provident Financial Corp. The business activities of the Corporation, primarily through the Bank and its subsidiary, consist of community banking and, to a lesser degree, investment services for customers and trustee services on behalf of the Bank. Community banking operations primarily consist of accepting deposits from customers within the communities surrounding the Corporation’s full service offices and investing those funds in single-family, multi-family and commercial real estate loans. Also, to a lesser extent, the Corporation makes construction, commercial business, consumer and other mortgage loans. The primary source of income in community banking is net interest income, which is the difference between the interest income earned on loans and investment securities, and the interest expense paid on interest-bearing deposits and borrowed funds. Additionally, certain fees are collected from borrowers and depositors, such as late payment charges, prepayment fees, returned check fees, deposit account service charges, ATM fees, IRA/KEOGH fees, safe deposit box fees, wire transfer fees and overdraft protection fees, among others. During the next three years, subject to market conditions, the Corporation intends to improve its community banking business by moderately increasing total assets by increasing single-family, multi-family, commercial real estate, construction and commercial business loans. In addition, the Corporation intends to decrease the percentage of time deposits in its deposit base and to increase the percentage of lower cost checking and savings accounts. This strategy is intended to improve core revenue through a higher net interest margin and ultimately, coupled with the anticipated growth of total assets, an increase in net interest income. While the Corporation’s long-term strategy is for moderate growth, management recognizes that growth may not occur as a result of weaknesses in general economic conditions. Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including the recent 150 basis point reductions in the targeted Federal Funds Rate, until the pandemic subsides, the Corporation expects its net interest income and net interest margin will be adversely affected in 2020 and possibly longer. Saleable single-family mortgage loan operations primarily consist of the origination and sale of mortgage loans secured by single-family residences. The primary sources of income in the saleable mortgage loan operations are gain on sale of loans and certain fees collected from borrowers in connection with the loan origination process. On February 4, 2019, the Corporation announced that it was in the best interests of the Corporation to scale back saleable single-family mortgage loan originations and improve on its efforts to increase the volume of portfolio single-family mortgage loan originations. Investment services operations primarily consist of selling alternative investment products such as annuities and mutual funds to the Bank’s depositors. Investment services and trustee services contribute a very small percentage of gross revenue. Provident Financial Corp performs trustee services for the Bank’s real estate secured loan transactions and has in the past held, and may in the future hold, real estate for investment. There are a number of risks associated with the business activities of the Corporation, many of which are beyond the Corporation’s control, including: changes in accounting principles, laws, regulation, interest rates and the economy, among others. The Corporation attempts to mitigate many of these risks through prudent banking practices, such as interest rate risk management, credit risk management, operational risk management, and liquidity risk management. The California economic environment presents heightened risk for the Corporation primarily with respect to real estate values and loan delinquencies. Since the majority of the Corporation’s loans are secured by real estate located within California, significant declines in the value of California real estate may also inhibit the Corporation’s ability to recover on defaulted loans by selling the underlying real estate. 45 COVID-19 Impact to the Corporation The Corporation is actively monitoring and responding to the effects of the rapidly-changing COVID-19 pandemic. The health, safety and well-being of our customers, employees and communities are the Corporation’s top priorities. Centers of Disease Control (“CDC”) guidelines, as well as directives from federal, state, county and local officials, are being closely followed to make informed operational decisions. During this unprecedented time, the Corporation is working diligently with its employees to implement CDC-advised health, hygiene and social distancing practices. To avoid service disruptions, most of our employees currently work from the Corporation’s premises and promote social distancing standards. To date, there have been no service disruptions. The Corporation’s Employee Assistance Program is provided at no cost for employees and family members seeking counseling services for mental health and emotional support needs. The Corporation also adheres to the Families First Coronavirus Response Act (FFCRA), which includes the Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion. During the COVID-19 pandemic, taking care of customers and providing uninterrupted access to services are top priorities for the Corporation. All of the Corporation’s banking centers are open for business with regular business hours while implementing CDC guidelines for social distancing and enhanced cleaning. Customers can also conduct their banking business using drive throughs, the online and mobile banking services, ATMs, and telephone banking. On March 27, 2020, the CARES Act was signed into law. Among other things, the CARES Act provides relief to borrowers, including the opportunity to defer loan payments while not negatively affecting their credit standing. For commercial and consumer customers, the Corporation has provided relief options, including payment deferrals and fee waivers. All loans modified due to COVID-19 will be separately monitored and any request for continuation of relief beyond the initial modification will be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate. As of April 30, 2020, the Corporation has processed and deemed eligible approximately 27 single-family forbearance requests, totaling $12.9 million or 1.4 percent of total loans, and approximately four multi-family, commercial real estate, and business loan requests, totaling $4.3 million or 0.6 percent of total loans. After the payment deferral period, normal loan payments will once again become due and payable. The forbearance amount will be due and payable in full as a balloon payment at the end of the loan term or sooner if the loan becomes due and payable in full at an earlier date. We believe the steps we are taking are necessary to effectively manage our portfolio and assist our clients through the ongoing uncertainty surrounding the duration, impact and government response to the COVID-19 pandemic. For customers that may need access to funds in their certificates of deposit to assist with living expenses during the COVID-19 pandemic, the Corporation is waiving early withdrawal penalties on a case by case basis. Overdraft and other fees are also waived on a case-by-case basis. We are cautious when paying overdrafts beyond the client's total deposit relationship, overdraft protection options or their overdraft coverage limits. The Corporation anticipates that the COVID-19 pandemic will continue to impact our business in future periods in one or more of the following ways, among others: ◾ Higher provisions for certain commercial real estate loans may be incurred, especially to borrowers with tenants in industries, such as hospitality, travel, food service and restaurants and bars, and businesses providing physical services; ◾ Significantly lower market interest rates which may have a negative impact on variable rate loans indexed to LIBOR, U.S. treasury and prime indices and on deposit pricing, as interest rate adjustments typically lag the effect on the yield 46 earned on interest-earning assets because rates on many deposit accounts are decision-based, not tied to a specific market-based index, and are based on competition for deposits; ◾ Certain additional fees for deposit and loan products may be waived or reduced; ◾ Non-interest income may decline due to a decrease in fees earned as spending by debit card customers complying with “Stay at Home” requirements and who otherwise may be adversely affected by reductions in their personal income or job losses; ◾ Non-interest expenses related to the effects of the COVID-19 pandemic may increase, including cleaning costs, supplies, equipment and other items; and ◾ Additional loan forbearance or modifications may occur and borrowers may default on their loans, which may necessitate further increases to the allowance for loan losses. While the full impact of COVID-19 on the Corporation's future financial results is uncertain and not currently estimable, the Corporation believes that the impact could be materially adverse to our financial condition and results of operations depending on the length and severity of the economic downturn brought on by the COVID-19 pandemic. Off-Balance Sheet Financing Arrangements and Contractual Obligations Commitments and Derivative Financial Instruments. The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, in the form of originating loans or providing funds under existing lines of credit, loan sale agreements to third parties and option contracts. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the accompanying Condensed Consolidated Statements of Financial Condition. The Corporation’s exposure to credit loss, in the event of non-performance by the counterparty to these financial instruments, is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in entering into financial instruments with off-balance sheet risk as it does for on-balance sheet instruments. For a discussion on commitments and derivative financial instruments, see Notes 6 and 10 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements. Contractual Obligations. The following table summarizes the Corporation’s contractual obligations at March 31, 2020 and the effect these obligations are expected to have on the Corporation’s liquidity and cash flows in future periods: Payments Due by Period (In Thousands) Less than 1 year 1 to less than 3 years 3 to 5 years Over 5 years Total Operating obligations $ 1,780 $ 2,870 $ 567 $ 110 $ 5,327 Pension benefits 259 517 518 6,150 7,444 Time deposits 102,955 64,455 20,394 807 188,611 FHLB – San Francisco advances 22,964 54,794 51,577 10,046 139,381 FHLB – San Francisco letter of credit 10,000 — — — 10,000 FHLB – San Francisco MPF credit enhancement (1) — — — 2,458 2,458 Total $ 137,958 $ 122,636 $ 73,056 $ 19,571 $ 353,221 (1) Represents the potential maximum potential recourse obligation for loans previously sold by the Bank to the FHLB – San Francisco under its Mortgage Partnership Finance (“MPF”) program. As of March 31, 2020, the Bank serviced $7.9 million of loans under this program. The estimated amounts by period are based on historical loss experience. The expected obligation for time deposits and FHLB – San Francisco advances include anticipated interest accruals based on the respective contractual terms. 47 Comparison of Financial Condition at March 31, 2020 and June 30, 2019 Total assets increased $22.7 million, or two percent, to $1.11 billion at March 31, 2020 from $1.08 billion at June 30, 2019. The increase was primarily attributable to increases in loans held for investment and cash and cash equivalents, partly offset by a decrease in investment securities. Total cash and cash equivalents, primarily excess cash deposited with the Federal Reserve Bank of San Francisco, increased $13.6 million, or 19 percent, to $84.3 million at March 31, 2020 from $70.6 million at June 30, 2019. The increase in the total cash and cash equivalents was primarily attributable to the pay downs of investment securities and the increase in borrowings, partly offset by the utilization of cash to fund the increase in loans held for investment. Investment securities (held to maturity and available for sale) decreased $25.7 million, or 26 percent, to $74.3 million at March 31, 2020 from $100.1 million at June 30, 2019. The decrease was primarily the result of scheduled and accelerated principal payments on mortgage-backed securities during the first nine months of fiscal 2020. For further analysis on investment securities, see Note 4 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements of this Form 10-Q. Loans held for investment increased $34.4 million, or four percent, to $914.3 million at March 31, 2020 from $879.9 million at June 30, 2019, primarily due to a $36.9 million increase in multi-family loans. During the first nine months of fiscal 2020, the Corporation originated $88.3 million of loans held for investment, consisting primarily of multi-family and single-family loans and also purchased $115.6 million of single-family and multi-family loans held for investment that are located throughout California. Total loan principal payments during the first nine months of fiscal 2020 were $171.7 million, up 22 percent from $140.5 million during the comparable period in fiscal 2019. The single-family loans held for investment balance at March 31, 2020 and June 30, 2019 was $326.7 million and $325.0 million, respectively, and represented approximately 36 percent and 37 percent of loans held for investment, respectively. The tables below describe the geographic dispersion of gross real estate secured loans held for investment at March 31, 2020 and June 30, 2019, as a percentage of the total dollar amount outstanding: As of March 31, 2020: Inland Empire Southern California (1) Other California Other States Total Loan Category Balance % Balance % Balance % Balance % Balance % Single-family $ 88,682 27 % $ 154,913 48 % $ 82,393 25 % $ 698 — % $ 326,686 100 % Multi-family 68,184 14 % 300,413 63 % 107,029 23 % 315 — % 475,941 100 % Commercial real estate 23,913 23 % 47,968 45 % 33,810 32 % — — % 105,691 100 % Construction 792 13 % 4,264 67 % 1,290 20 % — — % 6,346 100 % Total $ 181,571 20 % $ 507,558 55 % $ 224,522 25 % $ 1,013 — % $ 914,664 100 % (1) Other than the Inland Empire. 48 As of June 30, 2019: Inland Empire Southern California (1) Other California Other States Total Loan Category Balance % Balance % Balance % Balance % Balance % Single-family $ 104,967 33 % $ 146,963 45 % $ 71,997 22 % $ 1,025 — % $ 324,952 100 % Multi-family 70,241 16 % 272,282 62 % 96,192 22 % 326 — % 439,041 100 % Commercial real estate 30,551 27 % 54,010 48 % 27,367 25 % — — % 111,928 100 % Construction 525 11 % 3,579 77 % 534 12 % — — % 4,638 100 % Other — — % — — % 167 100 % — — % 167 100 % Total $ 206,284 24 % $ 476,834 54 % $ 196,257 22 % $ 1,351 — % $ 880,726 100 % (1) Other than the Inland Empire. Total deposits decreased $5.4 million to $835.8 million at March 31, 2020 from $841.3 million at June 30, 2019. Time deposits decreased $7.5 million, or four percent, to $185.6 million at March 31, 2020 from $193.1 million at June 30, 2019, while transaction accounts increased slightly to $650.2 million at March 31, 2020 from $648.1 million at June 30, 2019. The percentage of time deposits to total deposits decreased to 22 percent at March 31, 2020 from 23 percent at June 30, 2019, primarily due to a managed run-off of higher cost time deposits consistent with the reduction in the Bank’s funding needs resulting from no loans originated for sale during the first nine months of fiscal 2020. Total borrowings increased $30.0 million, or 30 percent, to $131.1 million at March 31, 2020 as compared to $101.1 million at June 30, 2019, due to additional long-term borrowings obtained with a lower average cost during the first quarter of fiscal 2020. The borrowings were primarily comprised of long-term FHLB - San Francisco advances used for interest rate risk management purposes. Total stockholders’ equity increased $2.5 million, or two percent, to $123.2 million at March 31, 2020 from $120.6 million at June 30, 2019, primarily as a result of the year-to-date net income of $6.1 million and stock-based compensation of $933,000, partly offset by $3.1 million of quarterly cash dividends paid to shareholders and stock repurchases of $1.3 million during the first nine months of fiscal 2020. The Corporation repurchased 66,041 shares of its common stock during the nine months ended March 31, 2020 at an average cost of $19.43 per share. Comparison of Operating Results for the Quarter and Nine Months Ended March 31, 2020 and 2019 The Corporation’s net income for the third quarter of fiscal 2020 was $1.1 million, in contrast to net loss of $151,000 in the same period of fiscal 2019. Compared to the same quarter last year, the increase was primarily attributable to lower non-interest expenses (mainly from salaries and employee benefits expenses decreasing due to no saleable single-family loan originations this quarter), partly offset by lower non-interest income (mainly due to significantly lower gain on sale of loans), higher provision for loan losses (mainly due to the COVID-19 pandemic) and lower net interest income. Earnings for the quarter reflect the impact of the COVID-19 pandemic which resulted in a substantial reduction in business activity or the closing of businesses in California. For the first nine months of fiscal 2020, the Corporation’s net income was $6.1 million, an increase of $2.5 million, or 68 percent, from $3.6 million in the same period of fiscal 2019. Compared to the same period last year, the increase in earnings was primarily attributable to a decrease in non-interest expense, partly offset by a decrease in non-interest income in both cases reflecting the scaling back of originations and sales of single-family loans and an increase in the provision for loan losses. The decrease in non-interest expense was mainly attributable to a decrease in salaries and employee benefits expenses and a decrease in premises and occupancy expenses. 49 The Corporation’s efficiency ratio, defined as non-interest expense divided by the sum of net interest income and non-interest income, improved to 75 percent for the third quarter of fiscal 2020 from 103 percent in the same period of fiscal 2019. For the first nine months of fiscal 2020, the Corporation’s efficiency ratio improved to 71 percent from 89 percent for the same period of fiscal 2019. Return on average assets was 0.41 percent in the third quarter of fiscal 2020, in contrast to (0.05) percent in the same period last year. For the first nine months of fiscal 2020, return on average assets was 0.74 percent, up 32 basis points from 0.42 percent in the same period last year. Return on average equity was 3.70 percent in the third quarter of fiscal 2020, in contrast to (0.49) percent in the same period last year. For the first nine months of fiscal 2020, return on average equity was 6.64 percent as compared to 3.97 percent for the same period last year. Diluted earnings per share for the third quarter of fiscal 2020 were $0.15, in contrast to diluted losses per share of $0.02 in the same period last year. For the first nine months of fiscal 2020, diluted earnings per share were $0.80, a 67 percent increase from $0.48 in the same period last year. Net Interest Income: For the Quarters Ended March 31, 2020 and 2019. Net interest income decreased by $722,000, or eight percent, to $8.9 million for the third quarter of fiscal 2020 from $9.6 million in the same period in fiscal 2019, as a result of a lower net interest margin and, to a lesser extent, a lower average interest-earning asset balance. The net interest margin decreased 23 basis points to 3.30 percent in the third quarter of fiscal 2020 from 3.53 percent in the same period of fiscal 2019, primarily due to a decrease in the average yield on interest-earning assets. The weighted-average yield on interest-earning assets decreased by 22 basis points to 3.87 percent in the third quarter of fiscal 2020 from 4.09 percent in the same quarter last year, and the weighted-average cost of interest-bearing liabilities increased by one basis point to 0.64 percent for the third quarter of fiscal 2020 as compared to 0.63 percent in the same quarter last year. The decrease in the average yield of interest-earning assets was primarily due to decreases in the average yield of loans receivable and interest-earning deposits, partly offset by an increase in the average yield on investment securities. The average balance of interest-earning assets decreased $11.3 million, or one percent, to $1.08 billion in the third quarter of fiscal 2020 from $1.09 billion in the comparable period of fiscal 2019, reflecting decreases in the average balance of investment securities and interest-earning deposits, partly offset by an increase in the average balance of loans receivable. The average balance of interest-bearing liabilities decreased by $11.1 million, or one percent, to $967.9 million in the third quarter of fiscal 2020 from $979.0 million in the same quarter last year primarily reflecting a decrease in the average balance of interest-bearing deposits, partly offset by an increase in the average balance of borrowings. Beginning in August 2019, the Federal Reserve reduced the targeted Federal Funds Rate by 25 basis points three times in 2019 and 150 basis points during the current quarter to a range of 0.00% to 0.25% at March 31, 2020. The 150 basis-point decrease in the targeted Federal Funds Rate in response to COVID-19 pandemic did not occur until late in the quarter in March 2020, and the full effect of the lower interest rate environment had not yet been realized at quarter end. Furthermore, the effect of recent changes in the targeted Federal Funds Rate on the cost of funding liabilities typically lags the effect on the yield earned on interest-earning assets because rates on many deposit accounts are decision-based, not tied to a specific market-based index, and are based on competition for deposits while most interest-earning assets adjust earlier because they are tied to a specific market-based index. Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including the recent 150 basis point reductions in the targeted Federal Funds Rate, until the pandemic subsides, the Corporation expects its net interest income and net interest margin will be adversely affected in 2020 and possibly longer. 50 For the Nine Months Ended March 31, 2020 and 2019. Net interest income decreased by $689,000, or two percent, to $28.1 million for the first nine months of fiscal 2020 from $28.8 million the same period in fiscal 2019, as a result of a lower average interest-earning asset balance, partly offset by a higher net interest margin. The average balance of interest-earning assets decreased $43.2 million, or four percent, to $1.07 billion in the first nine months of fiscal 2020 from $1.11 billion in the comparable period of fiscal 2019, primarily reflecting decreases in the average balance of loans receivable, investment securities and interest earning deposits. The average balance of interest-bearing liabilities decreased by $42.7 million, or four percent, to $958.3 million in the first nine months of fiscal 2020 from $1.00 billion in the same period last year primarily reflecting a decrease in the average balance of interest-bearing deposits, partly offset by an increase in the average balance of borrowings. The net interest margin was 3.51 percent in the first nine months of fiscal 2020, up six basis points from 3.45 percent in the same period of fiscal 2019, primarily due to an increase in the average yield on interest-earning assets, while the average cost of interest-bearing liabilities remained unchanged. The increase in the average yield of interest-earning assets was primarily due to increases in the average yield of investment securities and loans receivable, partly offset by decreases in the average yield on FHLB – San Francisco stock and interest-earning deposits. Interest Income: For the Quarters Ended March 31, 2020 and 2019. Total interest income decreased by $703,000, or six percent, to $10.4 million for the third quarter of fiscal 2020 as compared to $11.1 million for the same quarter of fiscal 2019. The decrease was primarily due to decreases in interest income from loans receivable, investment securities and interest-earning deposits. Interest income on loans receivable (including loans held for sale in the third quarter of fiscal 2019) decreased by $389,000, or four percent, to $9.6 million in the third quarter of fiscal 2020 from $10.0 million in the same quarter of fiscal 2019. The decrease was due to a lower average yield, partly offset by a higher average balance. The average loans receivable yield during the third quarter of fiscal 2020 decreased 24 basis points to 4.14 percent from 4.38 percent during the same quarter last year. The decrease in the average yield on loans receivable was primarily attributable to loans repricing downward reflecting declines in the targeted Federal Funds Rate offset in part by the increase to $451,000 of net deferred loan costs that was recognized in interest income as a result of loan payoffs and scheduled amortizations in the third quarter of fiscal 2020 as compared to $179,000 of net deferred loan costs in the same quarter of fiscal 2019. The average balance of loans receivable increased by $14.5 million, or two percent, to $929.5 million for the third quarter of fiscal 2020 from $915.0 million in the same quarter of fiscal 2019, primarily due to a decrease in the average balance of loans held for sale attributable to the scaling back of saleable single-family mortgage loan originations, partly offset by an increase in the average balance of loans held for investment. The average balance of loans held for investment increased $54.0 million, or six percent, to $929.5 million during the third quarter of fiscal 2020 from $875.5 million in the same quarter of fiscal 2019. The average yield on the loans held for investment decreased by 22 basis points to 4.14 percent in the third quarter of fiscal 2020 from 4.36 percent in the same quarter of fiscal 2019. There were no loans held for sale in the third quarter of fiscal 2020 as compared to the average balance of $39.5 million with an average yield of 4.74 percent in the same quarter of fiscal 2019. Interest income from investment securities decreased $114,000, or 19 percent, to $478,000 in the third quarter of fiscal 2020 from $592,000 for the same quarter of fiscal 2019. This decrease was attributable to a lower average balance, partly offset by a higher average yield. The average balance of investment securities decreased $23.3 million, or 23 percent, to $78.6 million in the third quarter of fiscal 2020 from $101.9 million in the same quarter of fiscal 2019. The decrease in the average balance of investment securities was primarily the result of scheduled and accelerated principal payments on mortgage-backed securities. The average investment securities yield increased 11 basis points to 2.43 percent in the third quarter of fiscal 2020 from 2.32 percent in the same quarter of fiscal 2019. The increase in the average investment securities yield was primarily attributable to a lower premium amortization between the quarters ($99,000 vs. $181,000), partly offset by the downward repricing of adjustable mortgage-backed securities. 51 The FHLB – San Francisco cash dividend received in the third quarter of fiscal 2020 was $144,000, unchanged from the same quarter of fiscal 2019. The average balance of FHLB – San Francisco stock in the third quarter of fiscal 2020 remained unchanged at $8.2 million as compared to the same quarter of fiscal 2019 and the average yield also remained unchanged at 7.03 percent in the third quarter of fiscal 2020 as compared to the same quarter last year. Interest income from interest-earning deposits, primarily cash deposited at the Federal Reserve Bank of San Francisco, was $186,000 in the third quarter of fiscal 2020, down 52 percent from $386,000 in the same quarter of fiscal 2019. The decrease was primarily due to a lower average yield and, to a lesser extent, a lower average balance. The average yield earned on interest-earning deposits decreased 120 basis points to 1.20 percent in the third quarter of fiscal 2020 from 2.40 percent in the comparable quarter last year, due primarily to decreases in the targeted Federal Funds Rate over last year. The average balance of the interest-earning deposits in the third quarter of fiscal 2020 was $61.9 million, a decrease of $2.5 million or four percent, from $64.4 million in the same quarter of fiscal 2019. For the Nine Months Ended March 31, 2020 and 2019. Total interest income decreased by $844,000, or three percent, to $32.7 million for the first nine months of fiscal 2020 from $33.6 million in the same period of fiscal 2019. The decrease was primarily due to decreases in interest income from loans receivable, interest-earning deposits and cash dividends received from FHLB – San Francisco stock, partly offset by an increase in interest income from investment securities. Loans receivable interest income (including loans held for sale in the first nine months of fiscal 2019) decreased $499,000, or two percent, to $30.0 million in the first nine months of fiscal 2020 from $30.5 million for the same period of fiscal 2019. The decrease was attributable to a lower average loan balance, partly offset by a higher average loan yield in the first nine months of fiscal 2020 in comparison to the same period last year. The average balance of loans receivable decreased $19.1 million, or two percent, to $922.2 million for the first nine months of fiscal 2020 from $941.3 million in the same period of fiscal 2019. The average loan yield during the first nine months of fiscal 2020 increased two basis points to 4.34 percent from 4.32 percent in the same period last year. The increase in the average yield on loans receivable was primarily attributable to $623,000 of net deferred loan costs that were recognized in interest income as a result of loan payoffs and scheduled amortization and $48,000 of deferred interest payments that was recognized from one non-performing loan that was paid off in the first nine months of fiscal 2020 as compared to $823,000 of net deferred loan costs that were recognized in interest income as a result of loan payoffs and scheduled amortization and $176,000 of deferred interest payments that were recognized from three non-performing loans that were paid off in the same period last year. The average balance of loans held for investment increased $39.9 million, or five percent, to $922.2 million during the first nine months of fiscal 2020 from $882.3 million in the same period of fiscal 2019. The average yield on the loans held for investment increased by four basis points to 4.34 percent in the first nine months of fiscal 2020 from 4.30 percent in the same period of fiscal 2019. There were no loans held for sale in the first nine months of fiscal 2020 as compared to the average balance of $59.0 million with an average yield of 4.71 percent in the same period of fiscal 2019. Interest income from investment securities increased $278,000, or 20 percent, to $1.7 million in the first nine months of fiscal 2020 from $1.4 million for the same period of fiscal 2019. This increase was attributable to a higher average yield, partly offset by a lower average balance. The average investment securities yield increased 60 basis points to 2.53 percent in the first nine months of fiscal 2020 from 1.93 percent in the same period of fiscal 2019. The increase in the average investment securities yield was primarily attributable to a lower premium amortization between the periods ($326,000 vs. $692,000) and purchases of investment securities during the last 12 months which had higher average yields than the existing portfolio. The average balance of investment securities decreased $8.2 million, or nine percent, to $87.3 million in the first nine months of fiscal 2020 from $95.5 million in the same period of fiscal 2019. The decrease in the average balance of investment securities was primarily the result of scheduled and accelerated principal payments on mortgage-backed securities, partly offset by purchases of mortgage-backed securities. 52 The FHLB – San Francisco cash dividend received in the first nine months of fiscal 2020 was $432,000, down 24 percent from $565,000 in the same period of fiscal 2019, primarily attributable to a special cash dividend of $133,000 received in the first nine months of fiscal 2019 and not replicated in the same period of fiscal 2020. As a result, the average yield decreased to 7.03 percent in the first nine months of fiscal 2020 as compared to 9.19 percent in the comparable period last year. Interest income from interest-earning deposits, primarily cash deposited at the Federal Reserve Bank of San Francisco, was $621,000 in the first nine months of fiscal 2020, down 44 percent from $1.1 million in the same period of fiscal 2019. The decrease was due to a lower average yield and, to a lesser extent, a lower average balance in the first nine months of fiscal 2020 as compared to the same period last year. The average yield decreased 59 basis points to 1.61 percent in the first nine months of fiscal 2020 from 2.20 percent in the comparable period last year, due primarily to the decreases in the targeted Federal Funds Rate over last year. The average balance of the interest-earning deposits in the first nine months of fiscal 2020 was $50.6 million, a decrease of $15.9 million or 24 percent, from $66.5 million in the same period of fiscal 2019. Interest Expense: For the Quarters Ended March 31, 2020 and 2019. Total interest expense remained virtually unchanged at $1.5 million, increasing $19,000 for the third quarter of fiscal 2020 as compared to the same quarter last year. This increase was attributable to higher borrowing expense, partly offset by lower deposit expense. Interest expense on deposits for the third quarter of fiscal 2020 was $746,000 as compared to $841,000 for the same period last year, a decrease of $95,000, or 11 percent. The decrease in interest expense on deposits was attributable to a lower average balance and a slightly lower average cost of deposits. The average balance of deposits decreased $36.4 million, or four percent, to $836.9 million during the quarter ended March 31, 2020 from $873.3 million during the same period last year. The decrease in the average balance was primarily attributable to decreases in time deposits and, to a lesser extent, savings deposits, partly offset by an increase in checking and money market deposits. The average cost of deposits improved, decreasing by three basis points to 0.36 percent during the third quarter of fiscal 2020 from 0.39 percent during the same quarter last year. The decrease in the average cost of deposits was attributable primarily to a lower percentage of time deposits to the total deposit balance and a two basis-point decrease in the average cost of time deposits. Strategically, the Corporation has been promoting transaction accounts and competing less aggressively for time deposits. The average balance of transaction accounts to total deposits in the third quarter of fiscal 2020 was 78 percent, compared to 75 percent in the same period of fiscal 2019. Interest expense on borrowings, consisting primarily of FHLB – San Francisco advances, for the third quarter of fiscal 2020 increased $114,000, or 17 percent, to $794,000 from $680,000 for the same period last year. The increase in interest expense on borrowings was the result of a higher average balance, partly offset by a lower average cost. The average balance of borrowings increased $25.3 million, or 24 percent, to $131.1 million during the quarter ended March 31, 2020 from $105.8 million during the same period last year. The average cost of borrowings decreased 17 basis points to 2.44 percent for the quarter ended March 31, 2020 from 2.61 percent in the same quarter last year. The decrease in the average cost of borrowings was primarily due to new long-term borrowings obtained during the first quarter of fiscal 2020 with a lower interest rate than the weighted average interest rate of all other borrowings. For the Nine Months Ended March 31, 2020 and 2019. Total interest expense decreased $155,000, or three percent, to $4.6 million in the first nine months of fiscal 2020 from $4.8 million in the same period last year. This decrease was attributable primarily to lower deposit expense, partly offset by higher borrowing expense. Interest expense on deposits for the first nine months of fiscal 2020 was $2.3 million as compared to $2.6 million in the same period last year, a decrease of $315,000 or 12 percent. The decrease in interest expense on deposits was primarily attributable to a lower average balance and, to a lesser extent, a lower average cost of deposits. The average balance of deposits decreased $54.9 million, or six percent, to $833.7 million during the nine months ended March 31, 2020 from $888.7 million during the same period last year. The decrease in the average balance was primarily attributable to a decrease in time deposits and, to a 53 lesser extent, savings deposits, partly offset by an increase in checking and money market deposits. The average cost of deposits decreased two basis points to 0.37 percent during the first nine months of fiscal 2020 from 0.39 percent during the same period last year. The decrease in the average cost of deposits was attributable primarily to a lower percentage of time deposits to the total deposit balance, partly offset by a two basis-point increase in the average cost of time deposits. The average balance of transaction accounts to total deposits in the first nine months of fiscal 2020 was 78 percent, compared to 74 percent in the same period of fiscal 2019. Interest expense on borrowings, consisting primarily of FHLB – San Francisco advances, for the first nine months of fiscal 2020 increased $160,000, or seven percent, to $2.3 million from $2.2 million in the same period last year. The increase in interest expense on borrowings was the result of a higher average balance, partly offset by a lower average cost. The average balance of borrowings increased by $12.2 million, or 11 percent, to $124.6 million during the nine months ended March 31, 2020 from $112.4 million during the same period last year, primarily due to the new long-term borrowings during the first quarter of fiscal 2020 at a lower average cost. The average cost of borrowings decreased eight basis points to 2.48 percent for the nine months ended March 31, 2020 from 2.56 percent in the same period last year. 54 The following tables present the average balance sheets for the quarter and nine months ended March 31, 2020 and 2019, respectively: Average Balance Sheets Quarter Ended March 31, 2020 Quarter Ended March 31, 2019 (Dollars In Thousands) Average Balance Interest Yield/ Cost Average Balance Interest Yield/ Cost Interest-earning assets: Loans receivable, net (1) $ 929,485 $ 9,622 4.14 % $ 915,049 $ 10,011 4.38 % Investment securities 78,632 478 2.43 % 101,851 592 2.32 % FHLB – San Francisco stock 8,199 144 7.03 % 8,199 144 7.03 % Interest-earning deposits 61,900 186 1.20 % 64,390 386 2.40 % Total interest-earning assets 1,078,216 10,430 3.87 % 1,089,489 11,133 4.09 % Non interest-earning assets 31,942 30,228 Total assets $ 1,110,158 $ 1,119,717 Interest-bearing liabilities: Checking and money market accounts (2) $ 391,458 $ 106 0.11 % $ 382,294 $ 102 0.11 % Savings accounts 260,124 131 0.20 % 274,400 139 0.21 % Time deposits 185,273 509 1.10 % 216,558 600 1.12 % Total deposits 836,855 746 0.36 % 873,252 841 0.39 % Borrowings 131,075 794 2.44 % 105,793 680 2.61 % Total interest-bearing liabilities 967,930 1,540 0.64 % 979,045 1,521 0.63 % Non interest-bearing liabilities 18,442 17,991 Total liabilities 986,372 997,036 Stockholders’ equity 123,786 122,681 Total liabilities and stockholders’ equity $ 1,110,158 $ 1,119,717 Net interest income $ 8,890 $ 9,612 Interest rate spread (3) 3.23 % 3.46 % Net interest margin (4) 3.30 % 3.53 % Ratio of average interest-earning assets to average interest-bearing liabilities 111.39 % 111.28 % Return (loss) on average assets 0.41 % (0.05) % Return (loss) on average equity 3.70 % (0.49) % (1) Includes loans held for sale foe the quarter ended March 31, 2019 and non-performing loans, as well as net deferred loan cost amortization of $451 and $179 for the quarter ended March 31, 2020 and 2019, respectively. The average balance of loans held for sale was $0 and $39.5 million during the quarter ended March 31, 2020 and 2019, respectively. (2) Includes the average balance of non interest-bearing checking accounts of $85.6 million and $83.1 million during the quarter ended March 31, 2020 and 2019, respectively. (3) Represents the difference between the weighted-average yield on all interest-earning assets and the weighted-average rate on all interest-bearing liabilities. (4) Represents net interest income before provision (recovery) for loan losses as a percentage of average interest-earning assets. 55 Nine Months Ended March 31, 2020 Nine Months Ended March 31, 2019 (Dollars In Thousands) Average Balance Interest Yield/ Cost Average Balance Interest Yield/ Cost Interest-earning assets: Loans receivable, net (1) $ 922,246 $ 30,017 4.34 % $ 941,336 $ 30,516 4.32 % Investment securities 87,260 1,659 2.53 % 95,494 1,381 1.93 % FHLB – San Francisco stock 8,199 432 7.03 % 8,199 565 9.19 % Interest-earning deposits 50,642 621 1.61 % 66,498 1,111 2.20 % Total interest-earning assets 1,068,347 32,729 4.08 % 1,111,527 33,573 4.03 % Non interest-earning assets 31,815 30,711 Total assets $ 1,100,162 $ 1,142,238 Interest-bearing liabilities: Checking and money market accounts (2) $ 387,017 $ 333 0.11 % $ 379,882 $ 327 0.11 % Savings accounts 259,143 396 0.20 % 281,814 437 0.21 % Time deposits 187,571 1,571 1.11 % 226,978 1,851 1.09 % Total deposits 833,731 2,300 0.37 % 888,674 2,615 0.39 % Borrowings 124,577 2,318 2.48 % 112,363 2,158 2.56 % Total interest-bearing liabilities 958,308 4,618 0.64 % 1,001,037 4,773 0.64 % Non interest-bearing liabilities 19,262 19,306 Total liabilities 977,570 1,020,343 Stockholders’ equity 122,592 121,895 Total liabilities and stockholders’ equity $ 1,100,162 $ 1,142,238 Net interest income $ 28,111 $ 28,800 Interest rate spread (3) 3.44 % 3.39 % Net interest margin (4) 3.51 % 3.45 % Ratio of average interest-earning assets to average interest-bearing liabilities 111.48 % 111.04 % Return on average assets 0.74 % 0.42 % Return on average equity 6.64 % 3.97 % (1) Includes loans held for sale for the nine months ended March 31, 2019 and non-performing loans, as well as net deferred loan cost amortization of $623 and $823 for the nine months ended March 31, 2020 and 2019, respectively. The average balance of loans held for sale was $0 and $59.0 million during the nine months ended March 31, 2020 and 2019, respectively. (2) Includes the average balance of non interest-bearing checking accounts of $83.7 million and $82.7 million during the nine months ended March 31, 2020 and 2019, respectively. (3) Represents the difference between the weighted-average yield on all interest-earning assets and the weighted-average rate on all interest-bearing liabilities. (4) Represents net interest income before provision (recovery) for loan losses as a percentage of average interest-earning assets. 56 The following tables set forth the effects of changing rates and volumes on interest income and expense for the quarter and nine months ended March 31, 2020 and 2019, respectively. Information is provided with respect to the effects attributable to changes in volume (changes in volume multiplied by prior rate), the effects attributable to changes in rate (changes in rate multiplied by prior volume) and the effects attributable to changes that cannot be allocated between rate and volume. Rate/Volume Variance Quarter Ended March 31, 2020 Compared To Quarter Ended March 31, 2019 Increase (Decrease) Due to (In Thousands) Rate Volume Rate/ Volume Net Interest-earning assets: Loans receivable (1) $ (538 ) $ 158 $ (9 ) $ (389 ) Investment securities 27 (135 ) (6 ) (114 ) FHLB – San Francisco stock — — — — Interest-earning deposits (192 ) (15 ) 7 (200 ) Total net change in income on interest-earning assets (703 ) 8 (8 ) (703 ) Interest-bearing liabilities: Checking and money market accounts — 4 — 4 Savings accounts (7 ) (1 ) — (8 ) Time deposits (6 ) (87 ) 2 (91 ) Borrowings (40 ) 165 (11 ) 114 Total net change in expense on interest-bearing liabilities (53 ) 81 (9 ) 19 Net (decrease) increase in net interest income $ (650 ) $ (73 ) $ 1 $ (722 ) (1) Includes loans held for sale for the quarter ended March 31, 2019 and non-performing loans. For purposes of calculating volume, rate and rate/volume variances, non-performing loans were included in the weighted-average balance outstanding. 57 Nine Months Ended March 31, 2020 Compared To Nine Months Ended March 31, 2019 Increase (Decrease) Due to (In Thousands) Rate Volume Rate/ Volume Net Interest-earning assets: Loans receivable (1) $ 123 $ (619 ) $ (3 ) $ (499 ) Investment securities 434 (119 ) (37 ) 278 FHLB – San Francisco stock (133 ) — — (133 ) Interest-bearing deposits (298 ) (262 ) 70 (490 ) Total net change in income on interest-earning assets 126 (1,000 ) 30 (844 ) Interest-bearing liabilities: Checking and money market accounts — 6 — 6 Savings accounts (7 ) (36 ) 2 (41 ) Time deposits 34 (308 ) (6 ) (280 ) Borrowings (69 ) 236 (7 ) 160 Total net change in expense on interest-bearing liabilities (42 ) (102 ) (11 ) (155 ) Net increase (decrease) in net interest income $ 168 $ (898 ) $ 41 $ (689 ) (1) Includes loans held for sale for the nine months ended March 31, 2019 and non-performing loans. For purposes of calculating volume, rate and rate/volume variances, non-performing loans were included in the weighted-average balance outstanding. Provision (Recovery) for Loan Losses: For the Quarters Ended March 31, 2020 and 2019. During the third quarter of fiscal 2020, the Corporation recorded a provision for loan losses of $874,000, as compared to a provision of $4,000 in the same period of fiscal 2019. The increase in provision for loan losses during this quarter was primarily attributable to a qualitative component established in our allowance for loan losses methodology in response to the deteriorating economic conditions and probable loan losses driven by the impact of COVID-19 pandemic on the U.S. and global economies. Non-performing loans, net of the allowance for loan losses and fair value adjustments decreased 42 percent to $3.6 million at March 31, 2020 from $6.2 million at June 30, 2019 and $6.1 million at March 31, 2019. Net loan recoveries in the third quarter of fiscal 2020 were $15,000 or 0.01 percent (annualized) of average loans receivable, unchanged from the same quarter of fiscal 2019. Total classified loans, net of the allowance for loan losses and fair value adjustments, were $15.1 million at March 31, 2020 as compared to $16.2 million at June 30, 2019 and $14.8 million at March 31, 2019. Classified loans net of the allowance for loan losses and fair value adjustments at March 31, 2020 were comprised of $11.4 million of loans in the special mention category and $3.7 million of loans in the substandard category as compared to $8.6 million of loans in the special mention category and $7.6 million of loans in the substandard category at June 30, 2019. For the Nine Months Ended March 31, 2020 and 2019. During the first nine months of fiscal 2020, the Corporation recorded a provision for loan losses of $671,000, as compared to a recovery of $450,000 in the same period of fiscal 2019. The provision for loan losses in the first nine months of fiscal 2020 was primarily attributable to a qualitative component established in our allowance for loan losses methodology in response to the deteriorating economic conditions and probable loan losses driven by the impact of COVID-19 pandemic on the U.S. and global economies. Net loan recoveries in the first nine months of fiscal 2020 were $63,000 or 0.01 percent (annualized) of average loans receivable, as compared to net loan recoveries of $145,000 or 0.02 percent (annualized) of average loans receivable in the same period of fiscal 2019. 58 The allowance for loan losses was determined through quantitative and qualitative adjustments including the Bank's charge-off experience and reflects the impact on loans held for investment from the current general economic conditions of the U.S. and California economies. See related discussion of “Asset Quality.” At March 31, 2020, the allowance for loan losses was $7.8 million, comprised of collectively evaluated allowances of $7.7 million and individually evaluated allowances of $51,000; in comparison to the allowance for loan losses of $7.1 million at June 30, 2019, comprised of collectively evaluated allowances of $7.0 million and individually evaluated allowances of $130,000. The allowance for loan losses as a percentage of gross loans held for investment was 0.85 percent at March 31, 2020 as compared to 0.80 percent at June 30, 2019. Management considers, based on currently available information, the allowance for loan losses sufficient to absorb potential losses inherent in loans held for investment. For further analysis on the allowance for loan losses, see Note 5 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements. A further decline in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Corporation’s financial condition and results of operations. Non-Interest Income: For the Quarters Ended March 31, 2020 and 2019. Total non-interest income decreased $2.0 million, or 64 percent, to $1.1 million for the quarter ended March 31, 2020 from $3.1 million for the same period last year. The decrease was primarily attributable to a decrease in the gain on sale of loans. The net gain on sale of loans decreased $1.7 million, or 99 percent, to a net gain of $14,000 for the third quarter of fiscal 2020 from a net gain of $1.7 million in the same quarter of fiscal 2019. The net gain in the third quarter of fiscal 2020 was primarily attributable to an accrual recovery of loan sale premium refunds from the early payoff of loans previously sold. There was no loan sale volume in the third quarter of fiscal 2020 consistent with the Corporation’s scaling back of the origination of saleable single-family mortgage loans, as compared to $95.8 million in the quarter ended March 31, 2019 with an average loan sale margin of 1.79 percent. For the Nine Months Ended March 31, 2020 and 2019. Total non-interest income decreased $7.7 million, or 69 percent, to $3.5 million for the nine months ended March 31, 2020 from $11.2 million for the same period last year. The decrease was primarily attributable to a decrease in the gain on sale of loans. The net gain on sale of loans decreased $7.2 million, or 102 percent, to a net loss of $115,000 for the first nine months of fiscal 2020 from a net gain of $7.1 million in the same period of fiscal 2019. The net loss in the first nine months of fiscal 2020 was primarily attributable to loan sale premium refunds from the early payoff of loans previously sold. There was no loan sale volume in the first nine months of fiscal 2020, as compared to $408.9 million during the nine months ended March 31, 2019 with an average loan sale margin of 1.73 percent. Non-Interest Expense: For the Quarters Ended March 31, 2020 and 2019. Total non-interest expense in the quarter ended March 31, 2020 was $7.5 million, a decrease of $5.5 million, or 42 percent, as compared to $13.0 million in the quarter ended March 31, 2019. The decrease was primarily attributable to scaling back the origination of saleable single-family mortgage loans resulting in significant reductions in salaries and employee benefits expenses due to lower incentive compensation and staff reductions and lower premises and occupancy expenses due to the closing of loan production offices, as well as reductions in other related expenses. 59 Salaries and employee benefits expense decreased $4.3 million, or 47 percent, to $5.0 million in the third quarter of fiscal 2020 from $9.3 million in the same period of fiscal 2019. The decrease was due primarily to lower salaries and employee benefits expenses resulting from fewer employees and incentive payments consistent with the scaling back of saleable single-family mortgage loan originations. The salaries and employee benefits expense in the third quarter of fiscal 2019 includes approximately $4.3 million of salaries and employee benefits expenses related to the staffing associated with saleable single-family loan originations, which includes $1.5 million of one-time costs associated with staff reductions. Total loan originations and purchases decreased $125.9 million, or 81 percent, to $28.8 million in the third quarter of fiscal 2020 from $154.7 million in the same quarter of fiscal 2019. Total full-time equivalent employees (“FTE”) were 183 at March 31, 2020, down 115 FTE or 39 percent from 298 FTE at March 31, 2019. Premises and occupancy expenses decreased $441,000, or 34 percent, to $845,000 in the third quarter of fiscal 2020 from $1.3 million in the same quarter of fiscal 2019. The decrease in premises and occupancy expenses was due primarily to the closure of 10 loan production offices and one retail banking center. Other non-interest expenses decreased $324,000, or 29 percent, to $798,000 in the third quarter of fiscal 2020 from $1.1 million in the same quarter of fiscal 2019. The decrease in other non-interest expenses was primarily attributable to lower loan origination expenses consistent with the scaling back of saleable single-family loan originations. For the Nine Months Ended March 31, 2020 and 2019. Total non-interest expense in the nine months ended March 31, 2020 was $22.3 million, a decrease of $13.3 million or 37 percent, as compared to $35.6 million in the same period ended March 31, 2019. The decrease was primarily due to decreases in salaries and employee benefits expense, premises and occupancy expenses and other non-interest expense. Salaries and employee benefits expense decreased $9.8 million, or 40 percent, to $15.0 million in the first nine months of fiscal 2020 from $24.8 million in the same period of fiscal 2019. The decrease was due primarily to lower salaries and employee benefits expenses resulting from fewer employees and incentive payments consistent with the scaling back of saleable single-family mortgage loan originations. The salaries and employee benefits expense in the first nine months of fiscal 2019 includes approximately $10.6 million of salaries and employee benefits expenses related to the staffing associated with saleable single-family loan originations, which includes $1.5 million of one-time costs associated with staff reductions. Total loan originations and purchases decreased $369.5 million, or 64 percent, to $203.9 million in the first nine months of fiscal 2020 from $573.4 million in the comparable period of fiscal 2019. Premises and occupancy expenses decreased $1.3 million, or 33 percent, to $2.6 million in the first nine months of fiscal 2020 from $3.9 million in the same period of fiscal 2019. Equipment expense decreased $478,000, or 36 percent, to $855,000 in the first nine months of fiscal 2020 from $1.3 million in the same period of fiscal 2019. The decrease in both premises and occupancy expenses and equipment expense was due primarily to the closure of 10 loan production offices and one retail banking center. Deposit insurance premiums and regulatory assessments decreased $364,000, or 79 percent, to $97,000 in the first nine months of fiscal 2020 from $461,000 in the same period of fiscal 2019. The decrease was due primarily to a small bank assessment credit awarded by the FDIC in September 2019 which reduced assessment fees for the first nine months of fiscal 2020. Other non-interest expenses decreased $892,000, or 29 percent, to $2.2 million in the first nine months of fiscal 2020 from $3.1 million in the same period of fiscal 2019. The decrease in other non-interest expenses was primarily attributable to lower loan origination expenses consistent with the scaling back of saleable single-family loan originations. In addition, a $296,000 partial reversion of a previously recognized legal settlement (see Part II, Item 1- Legal Proceedings) was recorded during the nine months ended March 31, 2020. 60 Provision (Benefit) for Income Taxes: The income tax provision reflects accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income, adjusted for the effect of all permanent differences between income for tax and financial reporting purposes, such as non-deductible stock-based compensation, earnings from bank-owned life insurance policies and certain California tax-exempt loans, among others. Therefore, there are fluctuations in the effective income tax rate from period to period based on the relationship of net permanent differences to income before tax. For the Quarters Ended March 31, 2020 and 2019. The Corporation’s income tax provision was $467,000 for the third quarter of fiscal 2020, in contrast to an income tax benefit of $189,000 in the same quarter last year. The effective income tax rate for the quarter ended March 31, 2020 was 28.97% and the effective income tax benefit for the quarter ended March 31, 2019 was 55.59%. The Corporation believes that the effective income tax rate applied in the third quarter of fiscal 2020 reflects its current income tax obligations. For the Nine Months Ended March 31, 2020 and 2019. The Corporation’s provision for income taxes was $2.6 million for the first nine months of fiscal 2020, up 106 percent from the $1.2 million provision for income taxes in the same period last year. The increase was attributable to higher income before income taxes in the first nine months of fiscal 2020 in comparison to the same period last year. The effective income tax rate for the nine months ended March 31, 2020 and 2019 was 29.49% and 25.42%, respectively. The Corporation believes that the effective income tax rate applied in the first nine months of fiscal 2020 reflects its current income tax obligations. Asset Quality Non-performing loans, net of the allowance for loan losses and fair value adjustments, consisting of loans with collateral located in California, was $3.6 million at March 31, 2020, down 42 percent from $6.2 million at June 30, 2019. Non-performing loans as a percentage of loans held for investment at March 31, 2020 was 0.40%, improving from 0.71% at June 30, 2019. The non-performing loans at March 31, 2020 are comprised of 16 single-family loans ($3.6 million) and one commercial business loan ($34,000). No interest accruals were made for loans that were past due 90 days or more or if the loans were deemed non-performing. As of March 31, 2020, total restructured loans decreased $2.0 million, or 53 percent, to $1.8 million from $3.8 million at June 30, 2019. At March 31, 2020 and June 30, 2019, $1.8 million and $1.9 million of these restructured loans were classified as non-performing, respectively. As of March 31, 2020, $683,000, or 39 percent, of the restructured loans have a current payment status, consistent with their modified payment terms; this compares to $2.4 million, or 63 percent, of restructured loans that had a current payment status, consistent with their modified payment terms as of June 30, 2019. There was no real estate owned at both March 31, 2020 and June 30, 2019. Non-performing assets, which includes non-performing loans and real estate owned, if any, decreased $2.6 million or 42 percent to $3.6 million or 0.33 percent of total assets at March 31, 2020 from $6.2 million or 0.57 percent of total assets at June 30, 2019. Restructured loans which are performing in accordance with their modified terms and are not otherwise classified non-accrual are not included in non-performing assets. For further analysis on non-performing loans and restructured loans, see Note 5 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements. A decline in real estate values subsequent to the time of origination of the Corporation’s real estate secured loans could result in higher loan delinquency levels, foreclosures, provisions for loan losses and net charge-offs. Real estate values and real estate markets are beyond the Corporation’s control and are generally affected by changes in national, regional or local economic conditions and other factors. These factors include fluctuations in interest rates and the availability of loans to potential 61 purchasers, changes in tax laws and other governmental statutes, regulations and policies and acts of nature, such as earthquakes, fires and national disasters particular to California where substantially all of the Corporation’s real estate collateral is located. If real estate values decline, the value of the real estate collateral securing the Corporation’s loans as set forth in the table could be significantly overstated. The Corporation’s ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished and it would be more likely to suffer losses on defaulted loans. The Corporation generally does not update the loan-to-value ratio (“LTV”) on its loans held for investment by obtaining new appraisals or broker price opinions (nor does the Corporation intend to do so in the future as a result of the costs and inefficiencies associated with completing the task) unless a specific loan has demonstrated deterioration or the Corporation receives a loan modification request from a borrower (in which case individually evaluated allowances are established, if required). The following table sets forth information with respect to the Corporation’s non-performing assets, net of allowance for loan losses and fair value adjustments, at the dates indicated: (In Thousands) At March 31, 2020 At June 30, 2019 Loans on non-accrual status (excluding restructured loans): Mortgage loans: Single-family $ 1,875 $ 3,315 Construction — 971 Total 1,875 4,286 Accruing loans past due 90 days or more — — Restructured loans on non-accrual status: Mortgage loans: Single-family 1,726 1,891 Commercial business loans 34 41 Total 1,760 1,932 Total non-performing loans 3,635 6,218 Real estate owned, net — — Total non-performing assets $ 3,635 $ 6,218 Non-performing loans as a percentage of loans held for investment, net of allowance for loan losses 0.40 % 0.71 % Non-performing loans as a percentage of total assets 0.33 % 0.57 % Non-performing assets as a percentage of total assets 0.33 % 0.57 % 62 The following table summarizes classified assets, which is comprised of classified loans, net of allowance for loan losses and fair value adjustments, and real estate owned, if any, at the dates indicated: At March 31, 2020 At June 30, 2019 (Dollars In Thousands) Balance Count Balance Count Special mention loans: Mortgage loans: Single-family $ 5,954 15 $ 3,795 13 Multi-family 3,799 3 3,864 3 Commercial real estate — — 927 1 Construction 1,671 1 — — Total special mention loans 11,424 19 8,586 17 Substandard loans: Mortgage loans: Single-family 3,601 18 6,631 23 Construction — — 971 1 Commercial business loans 34 1 41 1 Total substandard loans 3,635 19 7,643 25 Total classified loans 15,059 38 16,229 42 Real estate owned — — — — Total classified assets $ 15,059 38 $ 16,229 42 63 Loan Volume Activities The following table is provided to disclose details related to the volume of loans originated, purchased and sold for the quarter and nine months indicated: For the Quarters Ended March 31, For the Nine Months Ended March 31, (In Thousands) 2020 2019 2020 2019 Loans originated for sale: Retail originations $ — $ 72,353 $ — $ 287,399 Wholesale originations — 38,353 — 166,045 Total loans originated for sale — 110,706 — 453,444 Loans sold: Servicing released — (134,264 ) — (510,798 ) Servicing retained — (2,409 ) — (5,193 ) Total loans sold — (136,673 ) — (515,991 ) Loans originated for investment: Mortgage loans: Single-family 9,654 6,862 25,221 48,258 Multi-family 10,390 9,523 44,661 27,678 Commercial real estate 5,570 4,040 14,468 12,520 Construction 774 1,970 3,983 5,313 Consumer loans — — 1 — Total loans originated for investment 26,388 22,395 88,334 93,769 Loans purchased for investment: Mortgage loans: Single-family — 8,426 70,733 8,426 Multi-family 2,460 4,622 44,829 16,645 Commercial real estate — 1,157 — 1,157 Total loans purchased for investment 2,460 21,606 115,562 26,228 Mortgage loan principal payments (55,685 ) (36,456 ) (171,719 ) (140,548 ) (Decrease) increase in other items, net (1) (585 ) (499 ) 2,205 (1,831 ) Net (decrease) increase in loans held for investment and loans held for sale at fair value $ (27,422 ) $ (18,921 ) $ 34,382 $ (84,929 ) (1) Includes net changes in undisbursed loan funds, deferred loan fees or costs, allowance for loan losses, fair value of loans held for investment, fair value of loans held for sale, advance payments of escrows and repurchases. Liquidity and Capital Resources The Corporation’s primary sources of funds are deposits, proceeds from principal and interest payments on loans, proceeds from the maturity and sale of investment securities, FHLB – San Francisco advances, access to the discount window facility at the Federal Reserve Bank of San Francisco and access to a federal funds facility with its correspondent bank. While maturities 64 and scheduled amortization of loans and investment securities are a relatively predictable source of funds, deposit flows, mortgage prepayments and loan sales are greatly influenced by general interest rates, economic conditions and competition. The primary investing activity of the Corporation is the origination and purchase of loans held for investment. During the first nine months of fiscal 2020 and 2019, the Corporation originated and purchased loans held for investment of $203.9 million and $120.0 million, respectively. At March 31, 2020, the Corporation had loan origination commitments totaling $3.4 million, undisbursed lines of credit totaling $1.4 million and undisbursed construction loan funds totaling $5.5 million. The Corporation anticipates that it will have sufficient funds available to meet its current loan commitments. The Corporation’s primary financing activity is gathering deposits. During the first nine months of fiscal 2020, the net decrease in deposits was $5.4 million or one percent, primarily due to a decrease in time deposits. Time deposits decreased $7.5 million, or four percent, to $185.6 million at March 31, 2020 from $193.1 million at June 30, 2019. At March 31, 2020, time deposits with a principal amount of $250,000 or less and scheduled to mature in one year or less were $74.5 million and total time deposits with a principal amount of more than $250,000 and scheduled to mature in one year or less were $27.2 million. Historically, the Corporation has been able to retain a significant percentage of its time deposits as they mature. The Corporation must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities. The Corporation generally maintains sufficient cash and cash equivalents to meet short-term liquidity needs. At March 31, 2020, total cash and cash equivalents were $84.3 million, or eight percent of total assets. Depending on market conditions and the pricing of deposit products and FHLB – San Francisco advances, the Bank may rely on FHLB – San Francisco advances for part of its liquidity needs. As of March 31, 2020, total borrowings were $131.1 million and the financing availability at FHLB – San Francisco was limited to 35 percent of total assets; the remaining borrowing facility available was $244.1 million and the remaining available collateral was $389.9 million. In addition, the Bank has secured a $47.4 million discount window facility at the Federal Reserve Bank of San Francisco, collateralized by investment securities with a fair market value of $50.4 million. As of March 31, 2020, the Bank also has a borrowing arrangement in the form of a federal funds facility with its correspondent bank for $17.0 million that matures on June 30, 2020 which the Bank intends to renew upon maturity. The Bank had no advances under its correspondent bank or discount window facility as of March 31, 2020. Regulations require thrifts to maintain adequate liquidity to assure safe and sound operations. The Bank’s average liquidity ratio (defined as the ratio of average qualifying liquid assets to average deposits and borrowings) for the quarter ended March 31, 2020 decreased to 14.8 percent from 20.7 percent for the quarter ended June 30, 2019. The Bank, as a federally-chartered, federally insured savings bank, is subject to the capital requirements established by the OCC. Under the OCC's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. At March 31, 2020, the Bank exceeded all regulatory capital requirements. The Bank was categorized "well-capitalized" at March 31, 2020 under the regulations of the OCC. As a bank holding company registered with the Federal Reserve, Provident Financial Holdings, Inc. is subject to the capital adequacy requirements of the Federal Reserve. For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis, and the Federal Reserve expects the holding company’s subsidiary bank to be well capitalized under the prompt corrective action regulations. 65 The Bank's actual and required minimum capital amounts and ratios at the dates indicated are as follows (dollars in thousands): Regulatory Requirements Actual Minimum for Capital Adequacy Purposes (1) Minimum to Be Well Capitalized Amount Ratio Amount Ratio Amount Ratio Provident Savings Bank, F.S.B.: As of March 31, 2020 Tier 1 leverage capital (to adjusted average assets) $ 114,967 10.36 % $ 44,398 4.00 % $ 55,498 5.00 % CET1 capital (to risk-weighted assets) $ 114,967 17.26 % $ 46,624 7.00 % $ 43,294 6.50 % Tier 1 capital (to risk-weighted assets) $ 114,967 17.26 % $ 56,615 8.50 % $ 53,285 8.00 % Total capital (to risk-weighted assets) $ 122,867 18.45 % $ 69,936 10.50 % $ 66,606 10.00 % As of June 30, 2019 Tier 1 leverage capital (to adjusted average assets) $ 115,009 10.50 % $ 43,824 4.00 % $ 54,779 5.00 % CET1 capital (to risk-weighted assets) $ 115,009 18.00 % $ 44,730 7.00 % $ 41,535 6.50 % Tier 1 capital (to risk-weighted assets) $ 115,009 18.00 % $ 54,314 8.50 % $ 51,119 8.00 % Total capital (to risk-weighted assets) $ 122,225 19.13 % $ 67,094 10.50 % $ 63,899 10.00 % (1) The dollar amounts and ratios include the capital conservation buffer consisting of 2.50% of risk-weighted assets above the required minimum levels at March 31, 2020 and June 30, 2019 for CET1 capital, Tier 1 capital and Total capital. In addition to the minimum CET1, Tier 1 and Total capital ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. At March 31, 2020, the Bank was in compliance with this requirement. The ability of the Corporation to pay dividends to stockholders depends primarily on the ability of the Bank to pay dividends to the Corporation. The Bank may not declare or pay a cash dividend if the effect thereof would cause its net worth to be reduced below the regulatory capital requirements imposed by federal regulation. In the first nine months of fiscal 2020, the Bank paid a cash dividend of $7.5 million to the Corporation, while the Corporation paid $3.1 million of cash dividends to its shareholders. Supplemental Information At March 31, 2020 At June 30, 2019 At March 31, 2019 Loans serviced for others (in thousands) $94,948 $120,236 $123,049 Book value per share $16.56 $16.12 $16.17 66