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, 2021, the Corporation had total assets of $1.19 billion, total deposits of $933.8 million and total stockholders’ equity of $125.8 million. The Corporation has not engaged in any significant activity other than 41 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 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, 2021, 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, 2021, which was paid on March 11, 2021. 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. 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 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- 42 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; results of examinations of the Corporation by the FRB or of the Bank by the OCC or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to enter into a formal enforcement action or to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements and restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules, including as a result of Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, 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; 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 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; including as a result of the Coronavirus Aid, Relief, and Economic Security Act for 2020 (“CARES Act”) as amended by the Consolidated Appropriations Act 2021 (“CAA”) and the related Revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (“Interagency Statement”); war or terrorist activities; and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services, including as a result of COVID-19 and recent COVID-19 vaccination and economic stimulus efforts, 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 43 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 2020 Annual Report on Form 10-K for the year ended June 30, 2020 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, 2021 to the critical accounting policies as described in the Corporation’s 2020 Annual Report on Form 10-K for the period ended June 30, 2020. 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, 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 depositors, such as returned check fees, deposit account service charges, ATM fees, IRA/KEOGH fees, safe deposit box fees, wire transfer fees and overdraft protection fees, among others. 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 growth of the Corporation, an increase in net interest income. While the Corporation’s long-term strategy is for moderate growth, management recognizes that growth may be difficult as a result of weaknesses in general economic conditions. Further, 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 150 basis point reductions in March 2020 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 for calendar 2021 and possibly longer. 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, including as a result of COVID-19, 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 44 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. 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 its customers, employees and communities are the Corporation’s top priorities. The Centers of Disease Control and Prevention (“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 its employees currently work from the Corporation’s premises and promote social distancing standards. To date, there have been limited 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 requires certain employers to provide employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19, providing additional flexibility to its employees to help navigate their individual challenges. In addition, the Corporation adheres to the American Rescue Plan Act of 2021 (“ARPA”) and California’s 2021 COVID-19 Supplemental Paid Sick Leave (“CSPSL”) legislation, which require certain employers to provide employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19, providing additional flexibility to its employees to help navigate their individual challenges. 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 thrus, online and mobile banking services, ATMs, and telephone banking. On March 27, 2020, the CARES Act was signed into law and on April 7, 2020, the Board of Governors of the Federal Reserve System, FDIC, National Credit Union Administration, OCC and Consumer Financial Protection Bureau issued the Interagency Statement. Among other things, the CARES Act and Interagency Statement provided relief to borrowers, including the opportunity to defer loan payments while not negatively affecting their credit standing. The CARES Act and Interagency Statement 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. For commercial and consumer customers, the Corporation has provided relief options, including payment deferrals from 60 days to one year and fee waivers. On December 27, 2020, the CAA was signed into law. Among other purposes, this act provides coronavirus emergency response and relief, including extending relief offered under the CARES Act related to restructured loans as a result of COVID-19 through January 1, 2022 or 60 days after the end of the national emergency declared by the President, whichever is earlier. As of March 31, 2021, the Corporation has five single-family forbearance loans, with outstanding balances of $1.8 million or 0.21 percent of total loans, one multi-family loan with an outstanding balance of $308,000 or 0.04 percent of total loans and one commercial real estate loan with an outstanding balance of $945,000 or 0.11 percent of total loans that were modified in accordance with the CARES Act and Interagency Statement. In addition, as of March 31, 2021, the Corporation had no pending requests for payment relief. For additional information, see Note 5 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements 45 Interest income continues to be recognized during the payment deferrals, unless the loans are non-performing. After the payment deferral period, scheduled 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. All loans modified due to COVID-19 are 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. The Corporation believes the steps we are taking are necessary to effectively manage its portfolio and assist the borrowers 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. The Corporation is 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 may continue to impact the 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 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 habits change by debit card customers complying with COVID-19 governmental safety 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 its 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 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 46 commitments and derivative financial instruments, see Note 6 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements. Comparison of Financial Condition at March 31, 2021 and June 30, 2020 Total assets increased $12.5 million, or one percent, to $1.19 billion at March 31, 2021 from June 30, 2020. The increase was primarily attributable to an increase in investment securities, partly offset by decreases in cash and cash equivalents and loans held for investment. Total cash and cash equivalents, primarily excess cash deposited with the Federal Reserve Bank of San Francisco, decreased $44.4 million, or 38 percent, to $71.6 million at March 31, 2021 from $116.0 million at June 30, 2020. The decrease in total cash and cash equivalents was primarily attributable to the utilization of cash to fund purchases of investment securities and to pay off borrowings. Investment securities (held to maturity and available for sale) increased $120.0 million, or 97 percent, to $243.3 million at March 31, 2021 from $123.3 million at June 30, 2020. The increase was primarily the result of purchases of investment securities totaling $158.0 million, partly offset by scheduled and accelerated principal payments on mortgage-backed securities during the first nine months of fiscal 2021. 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 decreased $62.5 million, or seven percent, to $840.3 million at March 31, 2021 from $902.8 million at June 30, 2020, primarily due to the decrease in single-family loans. During the first nine months of fiscal 2021, the Corporation originated $127.1 million of loans held for investment, consisting primarily of single-family and multi-family loans and also purchased $11.5 million of multi-family loans held for investment that are located throughout California. Total loan principal payments during the first nine months of fiscal 2021 were $201.6 million, up 17 percent from $171.7 million during the comparable period in fiscal 2020. The single-family loans held for investment balance at March 31, 2021 and June 30, 2020 was $254.4 million and $298.8 million, respectively, and represented approximately 30 percent and 33 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, 2021 and June 30, 2020, as a percentage of the total dollar amount outstanding: As of March 31, 2021: Inland Empire Southern California (1) Other California Other States Total Loan Category Balance % Balance % Balance % Balance % Balance % Single-family $ 72,944 29 % $ 106,568 42 % $ 74,587 29 % $ 294 — % $ 254,393 100 % Multi-family 70,260 15 % 304,224 63 % 108,504 22 % 295 — % 483,283 100 % Commercial real estate 22,176 22 % 43,594 44 % 33,952 34 % — — % 99,722 100 % Construction 415 12 % 3,093 88 % — — % — — % 3,508 100 % Other — — % 140 100 % — — % — — % 140 100 % Total $ 165,795 20 % $ 457,619 54 % $ 217,043 26 % $ 589 — % $ 841,046 100 % (1) Other than the Inland Empire. 47 As of June 30, 2020: Inland Empire Southern California (1) Other California Other States Total Loan Category Balance % Balance % Balance % Balance % Balance % Single-family $ 82,019 28 % $ 140,888 47 % $ 75,372 25 % $ 531 — % $ 298,810 100 % Multi-family 66,427 14 % 321,556 65 % 103,609 21 % 311 — % 491,903 100 % Commercial real estate 23,501 22 % 47,484 45 % 34,250 33 % — — % 105,235 100 % Construction 1,115 14 % 5,190 67 % 1,496 19 % — — % 7,801 100 % Other — — % 143 100 % — — % — — % 143 100 % Total $ 173,062 19 % $ 515,261 57 % $ 214,727 24 % $ 842 — % $ 903,892 100 % (1) Other than the Inland Empire. Total deposits increased $40.8 million, or five percent, to $933.8 million at March 31, 2021 from $893.0 million at June 30, 2020, primarily due to increases in transaction accounts resulting primarily from government assistance programs related to the COVID-19 pandemic, partly offset by a decrease in higher cost time deposits. Transaction accounts increased $64.4 million, or nine percent, to $787.4 million at March 31, 2021 from $723.0 million at June 30, 2020, while time deposits decreased $23.6 million, or 14 percent, to $146.4 million at March 31, 2021 from $170.0 million at June 30, 2020. The percentage of time deposits to total deposits decreased to 16 percent at March 31, 2021 from 19 percent at June 30, 2020, primarily due to a managed run-off of higher cost time deposits consistent with the reduction in the Bank’s funding needs during the first nine months of fiscal 2021. Total borrowings decreased $30.0 million, or 21 percent, to $111.0 million at March 31, 2021 as compared to $141.0 million at June 30, 2020, due to repayments of long-term and short-term borrowings. At March 31, 2021, borrowings are primarily comprised of long-term FHLB - San Francisco advances used for interest rate risk management purposes. Total stockholders’ equity increased $1.8 million, or one percent, to $125.8 million at March 31, 2021 from $124.0 million at June 30, 2020, primarily as a result of year-to-date net income of $4.2 million, exercised stock options of $958,000 and stock-based compensation of $692,000, partly offset by $3.1 million of quarterly cash dividends paid to shareholders and $912,000 of stock repurchases. The Corporation repurchased 54,707 shares of its common stock under its April 2020 plan with an average cost of $16.66 per share and purchased 3,061 shares of distributed restricted stock in settlement of employee withholding tax obligations at an average cost of $12.01 per share during the first nine months of fiscal 2021. Comparison of Operating Results for the Quarter and Nine Months Ended March 31, 2021 and 2020 The Corporation’s net income for the third quarter of fiscal 2021 was $1.6 million, up $416,000 or 36 percent from $1.2 million in the same period of fiscal 2020. Compared to the same quarter last year, the increase was primarily attributable to a $1.1 million improvement in the provision for loan losses resulting in a recovery and lower non-interest expense (mainly, lower salaries and employee benefits expenses related to fewer employees and reduced incentive compensation), partly offset by lower net interest income. For the first nine months of fiscal 2021, the Corporation’s net income was $4.2 million, a decrease of $1.9 million, or 31 percent, from $6.1 million in the same period of fiscal 2020. Compared to the same period last year, the decrease in earnings was primarily attributable to a $4.8 million decrease in net-interest income; partly offset by lower non-interest expense as a result of a $2.0 million decrease in salaries and employee benefits expenses and a $612,000 decrease in the provision for loan losses. Earnings for the quarter and nine months ended March 31, 2021 reflect the continued impact of the COVID-19 pandemic which resulted in a substantial reduction in business activity or the closing of businesses in California during these periods. 48 The Corporation’s efficiency ratio, defined as non-interest expense divided by the sum of net interest income and non-interest income, increased to 80 percent for the third quarter of fiscal 2021 from 75 percent in the same period of fiscal 2020. For the first nine months of fiscal 2021, the Corporation’s efficiency ratio also increased to 78 percent from 71 percent for the same period of fiscal 2020. Return on average assets was 0.53 percent in the third quarter of fiscal 2021, up 12 basis points from 0.41 percent in the same period last year. For the first nine months of fiscal 2021, return on average assets was 0.48 percent, down 26 basis points from 0.74 percent in the same period last year. Return on average equity was 4.99 percent in the third quarter of fiscal 2021, up from 3.70 percent in the same period last year. For the first nine months of fiscal 2021, return on average equity was 4.51 percent, down from 6.64 percent for the same period last year. Diluted earnings per share for the third quarter of fiscal 2021 were $0.21, up 40 percent from diluted earnings per share of $0.15 in the same period last year. For the first nine months of fiscal 2021, diluted earnings per share were $0.56, down 30 percent from $0.80 in the same period last year. Net Interest Income: For the Quarter Ended March 31, 2021 and 2020. Net interest income decreased by $1.4 million, or 16 percent, to $7.5 million for the third quarter of fiscal 2021 from $8.9 million in the same period in fiscal 2020, as a result of a lower net interest margin, partly offset by a higher average interest-earning asset balance. The net interest margin decreased 70 basis points to 2.60 percent in the third quarter of fiscal 2021 from 3.30 percent in the same period of fiscal 2020, primarily due to a decrease in the average yield for all asset categories which exceed the decrease in interest-bearing liabilities. The decrease of the average yield was due primarily to the declines in interest rates on adjustable rate instruments and investment securities following decreases to short-term rates over the last year, including the emergency 150 basis point reduction in the targeted federal funds rate in March 2020 due to the COVID-19 pandemic. The weighted-average yield on interest-earning assets decreased by 93 basis points to 2.94 percent in the third quarter of fiscal 2021 from 3.87 percent in the same quarter last year, and the weighted-average cost of interest-bearing liabilities decreased by 26 basis points to 0.38 percent for the third quarter of fiscal 2021 as compared to 0.64 percent in the same quarter last year. The average balance of interest-earning assets increased $67.1 million, or six percent, to $1.15 billion in the third quarter of fiscal 2021 from $1.08 billion in the comparable period of fiscal 2020, reflecting primarily purchases of investment securities, partly offset by a decrease in the average balance of loans receivable. The average balance of interest-bearing liabilities increased by $64.5 million, or seven percent, to $1.03 billion in the third quarter of fiscal 2021 from $967.9 million in the same quarter last year primarily reflecting increases in the average balance of transaction accounts, partly offset by decreases in the average balance of time deposits and borrowings. For the Nine Months Ended March 31, 2021 and 2020. Net interest income decreased by $4.8 million, or 17 percent, to $23.3 million for the first nine months of fiscal 2021 from $28.1 million in the same period in fiscal 2020, as a result of a lower net interest margin, partly offset by a higher average interest-earning asset balance. The net interest margin was 2.70 percent in the first nine months of fiscal 2021, a decrease of 81 basis points from 3.51 percent in the same period of fiscal 2020, primarily due to a decrease in the average yield on interest-earning assets, partly offset by a decrease in the average cost of interest-bearing liabilities. The weighted-average yield on interest-earning assets decreased by 96 basis points to 3.12 percent in the first nine months of fiscal 2021 from 4.08 percent in the same period last year, and the weighted-average cost of interest-bearing liabilities decreased by 18 basis points to 0.46 percent for the first nine months of fiscal 2021 as compared to 0.64 percent in the same period last year. The average balance of interest-earning assets increased $80.2 million, or eight percent, to $1.15 billion in the first nine months of fiscal 2021 from $1.07 billion in the comparable period of fiscal 2020, primarily reflecting increases in the average balance of both investment securities and interest earning deposits, partly offset by a decrease in the average balance of loans receivable. The average balance of interest-bearing liabilities increased by $78.4 million, or eight percent, to $1.04 billion 49 in the first nine months of fiscal 2021 from $958.3 million in the same period last year primarily reflecting an increase in the average balance of transaction accounts, partly offset by a decrease in the average balance of time deposits. Beginning in August 2019, the Federal Reserve reduced the targeted federal funds rate by 25 basis points three times in 2019 and by 150 basis points during the quarter ended March 2020 to a range of 0.00% to 0.25%. The 150 basis-point decrease in the targeted federal funds rate in response to the COVID-19 pandemic did not occur until late in the quarter in March 2020, and the effect of the lower interest rate environment has continued to be realized during this quarter. Furthermore, the effect of the changes in the targeted federal funds rate on the cost of 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 until the pandemic subsides, the Corporation expects its net interest income and net interest margin will continue to be adversely affected in calendar year 2021 and possibly longer. Interest Income: For the Quarter Ended March 31, 2021 and 2020. Total interest income decreased by $2.0 million, or 19 percent, to $8.4 million for the third quarter of fiscal 2021 as compared to $10.4 million for the same quarter of fiscal 2020. The decrease was due to decreases in interest income from all interest-earning assets, mainly loans receivable. Interest income on loans receivable decreased by $1.7 million, or 18 percent, to $7.9 million in the third quarter of fiscal 2021 from $9.6 million in the same quarter of fiscal 2020. The decrease was due to a lower average yield and, to a lesser extent, a lower average balance. The average loans receivable yield during the third quarter of fiscal 2021 decreased 41 basis points to 3.73 percent from 4.14 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 and the increase of net deferred loan costs to $717,000 in the third quarter of fiscal 2021 from $451,000 in the same quarter of fiscal 2020. The average balance of loans receivable decreased by $86.1 million, or nine percent, to $843.4 million for the third quarter of fiscal 2021 from $929.5 million in the same quarter of fiscal 2020. Interest income from investment securities decreased $26,000, or five percent, to $452,000 in the third quarter of fiscal 2021 from $478,000 for the same quarter of fiscal 2020. This decrease was attributable to a lower average yield, partly offset by a higher average balance. The average investment securities yield decreased 162 basis points to 0.81 percent in the third quarter of fiscal 2021 from 2.43 percent in the same quarter of fiscal 2020. The decrease in the average investment securities yield was primarily attributable to investment securities purchases at a lower average yield than the existing portfolio, a higher premium amortization between the quarters ($534,000 vs. $99,000) and the downward repricing of adjustable rate mortgage-backed securities. The average balance of investment securities increased $143.7 million, or 183 percent, to $222.3 million in the third quarter of fiscal 2021 from $78.6 million in the same quarter of fiscal 2020. The increase in the average balance of investment securities was primarily attributable to purchases of investment securities, partly offset by scheduled and accelerated principal payments on mortgage-backed securities. The FHLB – San Francisco cash dividend received in the third quarter of fiscal 2021 was $100,000, down $44,000 or 31 percent from the same quarter of fiscal 2020. The average balance of FHLB – San Francisco stock in the third quarter of fiscal 2021 decreased slightly to $8.0 million from $8.2 million in the same quarter of fiscal 2020 and the average yield decreased to 5.02 percent in the third quarter of fiscal 2021 from 7.03 percent in the same quarter last year. Interest income from interest-earning deposits, primarily cash deposited at the Federal Reserve Bank of San Francisco, was $18,000 in the third quarter of fiscal 2021, down 90 percent from $186,000 in the same quarter of fiscal 2020. The decrease was due to a lower average yield, partly offset by a higher average balance. The average yield earned on interest-earning deposits decreased 110 basis points to 0.10 percent in the third quarter of fiscal 2021 from 1.20 percent in the comparable quarter last year, 50 due primarily to decreases in the targeted federal funds rate over the last year. The average balance of the interest-earning deposits in the third quarter of fiscal 2021 was $71.7 million, an increase of $9.8 million or 16 percent, from $61.9 million in the same quarter of fiscal 2020. For the Nine Months Ended March 31, 2021 and 2020. Total interest income decreased by $5.8 million, or 18 percent, to $26.9 million for the first nine months of fiscal 2021 from $32.7 million in the same period of fiscal 2020. The decrease was due to decreases in interest income from all interest-earning assets, mainly loans receivable. Loans receivable interest income decreased $4.9 million, or 16 percent, to $25.1 million in the first nine months of fiscal 2021 from $30.0 million for the same period of fiscal 2020. The decrease was due to a lower average yield and, to a lesser extent, a lower average balance. The average loan yield during the first nine months of fiscal 2021 decreased 48 basis points to 3.86 percent from 4.34 percent in the same period 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 and the increase of net deferred loan costs to $1.7 million in the first nine months of fiscal 2021 from $623,000 in the same period of fiscal 2020. The higher net deferred loan costs was due primarily to higher loan prepayments during the periods and in the first nine months of fiscal 2020 deferred loan fees of $520,000 which were recognized as interest income as a result of loan payoffs from previously classified non-performing loans. The average balance of loans receivable decreased $53.8 million, or six percent, to $868.5 million for the first nine months of fiscal 2021 from $922.3 million in the same period of fiscal 2020. Interest income from investment securities decreased $281,000, or 17 percent, to $1.4 million in the first nine months of fiscal 2021 from $1.7 million for the same period of fiscal 2020. This decrease was attributable to a lower average yield, partly offset by a higher average balance. The average investment securities yield decreased 159 basis points to 0.94 percent in the first nine months of fiscal 2021 from 2.53 percent in the same period of fiscal 2020. The decrease in the average investment securities yield was primarily attributable to a higher premium amortization ($1.4 million compared to $326,000) and the purchases of investment securities during the last 12 months which had lower average yields than the existing portfolio. The average balance of investment securities increased $108.2 million, or 124 percent, to $195.5 million in the first nine months of fiscal 2021 from $87.3 million in the same period of fiscal 2020. The increase in the average balance of investment securities was primarily the result of purchases of mortgage-backed securities, partly offset by scheduled and accelerated principal payments on mortgage-backed securities. The FHLB – San Francisco cash dividend received in the first nine months of fiscal 2021 was $300,000, down 31 percent from $432,000 in the same period of fiscal 2020. As a result, the average yield decreased to 5.02 percent in the first nine months of fiscal 2021 as compared to 7.03 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 $59,000 in the first nine months of fiscal 2021, down 90 percent from $621,000 in the same period of fiscal 2020. The decrease was due to a lower average yield, partly offset by a higher average balance. The average yield earned on interest-earning deposits decreased 151 basis points to 0.10 percent in the first nine months of fiscal 2021 from 1.61 percent in the comparable quarter last year, due primarily to decreases in the targeted federal funds rate over the last year. The average balance of the interest-earning deposits in the first nine months of fiscal 2021 was $76.6 million, an increase of $26.0 million or 51 percent, from $50.6 million in the same period of fiscal 2020. Interest Expense: For the Quarter Ended March 31, 2021 and 2020. Total interest expense decreased by $567,000 or 37 percent to $973,000 in the third quarter of fiscal 2021 from $1.5 million in the same quarter last year. This decrease was attributable to lower deposit expense and, to a lesser extent, lower borrowing expense. Interest expense on deposits for the third quarter of fiscal 2021 was $380,000 as compared to $746,000 for the same period last year, a decrease of $366,000, or 49 percent. The decrease in interest expense on deposits was attributable to a lower average cost 51 of deposits, partly offset by a higher average balance. The average cost of deposits improved, decreasing by 19 basis points to 0.17 percent during the third quarter of fiscal 2021 from 0.36 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 30 basis-point decrease in the average cost of time deposits. The average cost of transaction accounts also decreased by 10 basis points. The average balance of deposits increased $79.9 million, or 10 percent, to $916.7 million during the quarter ended March 31, 2021 from $836.9 million during the same period last year. The increase in the average balance was primarily attributable to increases in transaction accounts resulting primarily from government assistance programs related to the COVID-19 pandemic, partly offset by a decrease in higher cost 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 2021 was 84 percent, compared to 78 percent in the same period of fiscal 2020. Interest expense on borrowings, consisting primarily of FHLB – San Francisco advances, for the third quarter of fiscal 2021 decreased $201,000, or 25 percent, to $593,000 from $794,000 for the same period last year. The decrease in interest expense on borrowings was the result of a lower average cost and, to a lesser extent, a lower average balance. The average cost of borrowings decreased 36 basis points to 2.08 percent for the quarter ended March 31, 2021 from 2.44 percent in the same quarter last year. The decrease in the average cost of borrowings was primarily due to prepayments and maturities of borrowings. The average balance of borrowings decreased $15.4 million, or 12 percent, to $115.7 million during the quarter ended March 31, 2021 from $131.1 million during the same period last year. For the Nine Months Ended March 31, 2021 and 2020. Total interest expense decreased $1.0 million, or 22 percent to $3.6 million in the first nine months of fiscal 2021 from $4.6 million in the same period last year. This decrease was attributable primarily to lower deposit expense and, to a lesser extent, lower borrowing expense. Interest expense on deposits for the first nine months of fiscal 2021 was $1.4 million as compared to $2.3 million in the same period last year, a decrease of $901,000 or 39 percent. The decrease in interest expense on deposits was primarily attributable to a lower average cost, partly offset by a higher average balance of deposits. 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 26 basis-point decrease in the average cost of time deposits. The average cost of transaction accounts also decreased by eight basis points. The average cost of deposits decreased 16 basis points to 0.21 percent during the first nine months of fiscal 2021 from 0.37 percent during the same period last year. The average balance of deposits increased $72.5 million, or nine percent, to $906.2 million during the nine months ended March 31, 2021 from $833.7 million during the same period last year. The increase in the average balance was primarily attributable to increases in transaction accounts resulting primarily from government assistance programs related to the COVID-19 pandemic, partly offset by a decrease in higher cost time deposits. The average balance of transaction accounts to total deposits in the first nine months of fiscal 2021 was 83 percent, compared to 78 percent in the same period of fiscal 2020. Interest expense on borrowings, consisting primarily of FHLB – San Francisco advances, for the first nine months of fiscal 2021 decreased $120,000, or five percent, to $2.2 million from $2.3 million in the same period last year. The decrease in interest expense on borrowings was the result of a lower average cost, partly offset by a higher average balance. The average cost of borrowings decreased 24 basis points to 2.24 percent for the nine months ended March 31, 2021 from 2.48 percent in the same period last year. The average balance of borrowings increased by $5.9 million, or five percent, to $130.5 million during the nine months ended March 31, 2021 from $124.6 million during the same period last year, primarily due to new long-term borrowings at a lower average cost, partly offset by prepayments and maturities. 52 The following tables present the average balance sheets for the quarter and nine months ended March 31, 2021 and 2020, respectively: Average Balance Sheets Quarter Ended March 31, 2021 Quarter Ended March 31, 2020 (Dollars In Thousands) Average Balance Interest Yield/ Cost Average Balance Interest Yield/ Cost Interest-earning assets: Loans receivable, net (1) $ 843,374 $ 7,860 3.73 % $ 929,485 $ 9,622 4.14 % Investment securities 222,284 452 0.81 % 78,632 478 2.43 % FHLB – San Francisco stock 7,970 100 5.02 % 8,199 144 7.03 % Interest-earning deposits 71,728 18 0.10 % 61,900 186 1.20 % Total interest-earning assets 1,145,356 8,430 2.94 % 1,078,216 10,430 3.87 % Non interest-earning assets 31,258 31,942 Total assets $ 1,176,614 $ 1,110,158 Interest-bearing liabilities: Checking and money market accounts (2) $ 473,196 $ 50 0.04 % $ 391,458 $ 106 0.11 % Savings accounts 294,732 38 0.05 % 260,124 131 0.20 % Time deposits 148,821 292 0.80 % 185,273 509 1.10 % Total deposits 916,749 380 0.17 % 836,855 746 0.36 % Borrowings 115,672 593 2.08 % 131,075 794 2.44 % Total interest-bearing liabilities 1,032,421 973 0.38 % 967,930 1,540 0.64 % Non interest-bearing liabilities 19,141 18,442 Total liabilities 1,051,562 986,372 Stockholders’ equity 125,052 123,786 Total liabilities and stockholders’ equity $ 1,176,614 $ 1,110,158 Net interest income $ 7,457 $ 8,890 Interest rate spread (3) 2.56 % 3.23 % Net interest margin (4) 2.60 % 3.30 % Ratio of average interest-earning assets to average interest-bearing liabilities 110.94 % 111.39 % Return on average assets 0.53 % 0.41 % Return on average equity 4.99 % 3.70 % (1) Includes non-performing loans and net deferred loan cost amortization of $717 thousand and $451 thousand for the quarter ended March 31, 2021 and 2020, respectively. (2) Includes the average balance of non interest-bearing checking accounts of $114.1 million and $85.6 million during the quarter ended March 31, 2021 and 2020, 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. 53 Nine Months Ended March 31, 2021 Nine Months Ended March 31, 2020 (Dollars In Thousands) Average Balance Interest Yield/ Cost Average Balance Interest Yield/ Cost Interest-earning assets: Loans receivable, net (1) $ 868,462 $ 25,121 3.86 % $ 922,246 $ 30,017 4.34 % Investment securities 195,463 1,378 0.94 % 87,260 1,659 2.53 % FHLB – San Francisco stock 7,970 300 5.02 % 8,199 432 7.03 % Interest-earning deposits 76,642 59 0.10 % 50,642 621 1.61 % Total interest-earning assets 1,148,537 26,858 3.12 % 1,068,347 32,729 4.08 % Non interest-earning assets 30,980 31,815 Total assets $ 1,079,517 $ 1,100,162 Interest-bearing liabilities: Checking and money market accounts (2) $ 463,291 $ 220 0.06 % $ 387,017 $ 333 0.11 % Savings accounts 284,787 170 0.08 % 259,143 396 0.20 % Time deposits 158,091 1,009 0.85 % 187,571 1,571 1.11 % Total deposits 906,169 1,399 0.21 % 833,731 2,300 0.37 % Borrowings 130,510 2,198 2.24 % 124,577 2,318 2.48 % Total interest-bearing liabilities 1,036,679 3,597 0.46 % 958,308 4,618 0.64 % Non interest-bearing liabilities 18,089 19,262 Total liabilities 1,054,768 977,570 Stockholders’ equity 124,749 122,592 Total liabilities and stockholders’ equity $ 1,079,517 $ 1,100,162 Net interest income $ 23,261 $ 28,111 Interest rate spread (3) 2.66 % 3.44 % Net interest margin (4) 2.70 % 3.51 % Ratio of average interest-earning assets to average interest-bearing liabilities 110.79 % 111.48 % Return on average assets 0.48 % 0.74 % Return on average equity 4.51 % 6.64 % (1) Includes non-performing loans and net deferred loan cost amortization of $1.7 million and $623 thousand for the nine months ended March 31, 2021 and 2020, respectively. (2) Includes the average balance of non interest-bearing checking accounts of $113.9 million and $83.7 million during the nine months ended March 31, 2021 and 2020, 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. 54 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, 2021 and 2020, 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, 2021 Compared To Quarter Ended March 31, 2020 Increase (Decrease) Due to (In Thousands) Rate Volume Rate/ Volume Net Interest-earning assets: Loans receivable (1) $ (959 ) $ (891 ) $ 88 $ (1,762 ) Investment securities (317 ) 873 (582 ) (26 ) FHLB – San Francisco stock (41 ) (4 ) 1 (44 ) Interest-earning deposits (170 ) 29 (27 ) (168 ) Total net change in income on interest-earning assets (1,487 ) 7 (520 ) (2,000 ) Interest-bearing liabilities: Checking and money market accounts (64 ) 22 (14 ) (56 ) Savings accounts (97 ) 17 (13 ) (93 ) Time deposits (145 ) (99 ) 27 (217 ) Borrowings (122 ) (93 ) 14 (201 ) Total net change in expense on interest-bearing liabilities (428 ) (153 ) 14 (567 ) Net (decrease) increase in net interest income $ (1,059 ) $ 160 $ (534 ) $ (1,433 ) (1) For purposes of calculating volume, rate and rate/volume variances, non-performing loans were included in the weighted-average balance outstanding. Nine Months Ended March 31, 2021 Compared To Nine Months Ended March 31, 2020 Increase (Decrease) Due to (In Thousands) Rate Volume Rate/ Volume Net Interest-earning assets: Loans receivable (1) $ (3,339 ) $ (1,751 ) $ 194 $ (4,896 ) Investment securities (1,044 ) 2,053 (1,290 ) (281 ) FHLB – San Francisco stock (123 ) (12 ) 3 (132 ) Interest-bearing deposits (582 ) 314 (294 ) (562 ) Total net change in income on interest-earning assets (5,088 ) 604 (1,387 ) (5,871 ) Interest-bearing liabilities: Checking and money market accounts (147 ) 63 (29 ) (113 ) Savings accounts (242 ) 39 (23 ) (226 ) Time deposits (374 ) (246 ) 58 (562 ) Borrowings (219 ) 110 (11 ) (120 ) Total net change in expense on interest-bearing liabilities (982 ) (34 ) (5 ) (1,021 ) Net (decrease) increase in net interest income $ (4,106 ) $ 638 $ (1,382 ) $ (4,850 ) (1) For purposes of calculating volume, rate and rate/volume variances, non-performing loans were included in the weighted-average balance outstanding. 55 Provision (Recovery) for Loan Losses: For the Quarter Ended March 31, 2021 and 2020. During the third quarter of fiscal 2021, the Corporation recorded a recovery from the allowance for loan losses of $200,000, as compared to a provision for loan losses of $874,000 in the same period of fiscal 2020 . The recovery from the allowance for loan losses for the third quarter of fiscal 2021 was due to a recovery within all loan categories with the exception of multi-family loans , which primarily reflects an improved economic outlook as of March 31, 2021, reducing the expected impact of the pandemic on the credit quality of the loan portfolio, and declining loan balances; while the provision for loan losses recorded in the third quarter of fiscal 2020 primarily reflected the deterioration in forecasted economic metrics at March 31, 2021 as a result of the COVID-19 pandemic, partly offset by the decrease in loan balances. For the Nine Months Ended March 31, 2021 and 2020. During the first nine months of fiscal 2021, the Corporation recorded a provision for loan losses of $59,000, down from $671,000 in the same period of fiscal 2020. The decrease in provision for loan losses during this nine-month period was primarily attributable to the decrease in loan balances and an improvement in the forecasted economic metrics utilized in the qualitative component adjustment to our allowance for loan losses during the first nine months of fiscal 2021. Non-performing loans, net of the allowance for loan losses and fair value adjustments increased 100 percent to $9.8 million at March 31, 2021 from $4.9 million at June 30, 2020 and were $3.6 million at March 31, 2020. Net loan recoveries in the third quarter of fiscal 2021 were $8,000 or 0.00 percent (annualized) of average loans receivable, as compared to net loan recoveries of $15,000 or 0.01 percent (annualized) of average loans receivable in the same quarter of fiscal 2020. For the first nine months of fiscal 2021, the net loan recoveries were $22,000 or 0.00 percent (annualized) of average loans receivable as compared to net loan recoveries of $63,000 or 0.01 percent (annualized) of average loans receivable in the same period of fiscal 2020. Total classified loans, net of the allowance for loan losses and fair value adjustments, were $12.2 million at March 31, 2021 as compared to $14.1 million at June 30, 2020 and $15.1 million at March 31, 2020. Classified loans net of the allowance for loan losses and fair value adjustments at March 31, 2021 were comprised of $2.5 million of loans in the special mention category and $9.7 million of loans in the substandard category as compared to $8.6 million of loans in the special mention category and $5.5 million of loans in the substandard category at June 30, 2020. 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, 2021, the allowance for loan losses was $8.3 million, comprised of collectively evaluated allowances of $7.8 million and individually evaluated allowances of $572,000; in comparison to the allowance for loan losses of $8.3 million at June 30, 2020, comprised of collectively evaluated allowances of $8.2 million and individually evaluated allowances of $100,000. The allowance for loan losses as a percentage of gross loans held for investment was 0.98 percent at March 31, 2021 as compared to 0.91 percent at June 30, 2020. 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 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. 56 Non-Interest Income: For the Quarter Ended March 31, 2021 and 2020. Total non-interest income increased $98,000, or nine percent, to $1.2 million for the quarter ended March 31, 2021 from $1.1 million for the same period last year. The increase was primarily attributable to an increase in loan servicing and other fees, partly offset by a decrease in deposit account fees. Loan servicing and other fees increased $224,000 or 171 percent to $355,000 in the third quarter of fiscal 2021 from $131,000 in the same quarter last year. The increase was due primarily to a recovery from servicing asset reserves attributable to lower loan prepayment estimates. Deposit account fees decreased $105,000 or 25 percent to $318,000 in the third quarter of fiscal 2021 from $423,000 in the same quarter last year. The decrease was due primarily to certain fees that were waived related to accounts impacted by the COVID-19 pandemic and reduced transactions reflecting changes in spending habits due to the COVID-19 pandemic. For the Nine Months Ended March 31, 2021 and 2020. Total non-interest income decreased $183,000, or five percent, to $3.3 million for the nine months ended March 31, 2021 from $3.5 million for the same period last year. The decrease was primarily attributable to a decrease in deposit account fees, partly offset by an increase in loan servicing and other fees. Loan servicing and other fees increased $249,000 or 39 percent to $880,000 in the first nine months of fiscal 2021 from $631,000 in the same period last year. The increase was due primarily to an increase in prepayment fees resulting from higher loan payoffs, particularly in multi-family loans. Deposit account fees decreased $364,000 or 28 percent to $957,000 in the first nine months of fiscal 2021 from $1.3 million in the same period last year. The decrease was due primarily to certain fees that were waived related to accounts impacted by the COVID-19 pandemic and reduced transactions reflecting changes in spending habits due to the COVID-19 pandemic. Non-Interest Expense: For the Quarter Ended March 31, 2021 and 2020. Total non-interest expense in the quarter ended March 31, 2021 was $6.9 million, a decrease of $596,000, or eight percent, as compared to $7.5 million in the quarter ended March 31, 2020. The decrease was primarily attributable to a decrease in salaries and employee benefits expenses, partly offset by higher deposit insurance premiums and regulatory assessment expenses. Salaries and employee benefits expense decreased $725,000, or 15 percent, to $4.2 million in the third quarter of fiscal 2021 from $5.0 million in the same period of fiscal 2020. The decrease was due primarily to fewer employees and lower employee bonus and other incentive payments. Total full-time equivalent employees (“FTE”) were 162 at March 31, 2021, down 21 FTE or 11 percent from 183 FTE at March 31, 2020; while total loan originations and purchases increased $32.3 million, or 112 percent, to $61.1 million in the third quarter of fiscal 2021 from $28.8 million in the same quarter of fiscal 2020. Deposit insurance premiums and regulatory assessment expenses were $154,000 in the third quarter of fiscal 2021, up 185 percent from $54,000 in the same quarter of fiscal 2020. The increase was due primarily to FDIC insurance premium credits applied in the third quarter of fiscal 2020, which were not replicated in the third quarter of fiscal 2021. For the Nine Months Ended March 31, 2021 and 2020. Total non-interest expense in the nine months ended March 31, 2021 was $20.8 million, a decrease of $1.5 million, or seven percent, as compared to $22.3 million in the nine months ended March 31, 2020. The decrease was primarily attributable to a decrease in salaries and employee benefits expenses, partly offset by higher deposit insurance premiums and regulatory assessment expenses. 57 Salaries and employee benefits expense decreased $2.0 million, or 13 percent, to $13.0 million in the first nine months of fiscal 2021 from $15.0 million in the same period of fiscal 2020. The decrease was due primarily to fewer employees and lower employee bonus and other incentive payments. Total loan originations and purchases decreased $65.2 million, or 32 percent, to $138.7 million in the first nine months of fiscal 2021 from $203.9 million in the same period of fiscal 2020. Deposit insurance premiums and regulatory assessment expenses were $429,000 in the first nine months of fiscal 2021, up 342 percent from $97,000 in the same period of fiscal 2020. The increase was due primarily to FDIC insurance premium credits applied in the first nine months of fiscal 2020, which were not replicated in the same period of fiscal 2021. Provision 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 Quarter Ended March 31, 2021 and 2020. The Corporation’s income tax provision was $386,000 for the third quarter of fiscal 2021, a 17 percent decrease from $467,000 in the same quarter last year, primarily due to tax benefits attributable to the exercise of stock options, partly offset by higher net income before income taxes. The effective income tax rate for the quarter ended March 31, 2021 was 19.8 percent as compared to 29.0 percent for the quarter ended March 31, 2020. The Corporation believes that the effective income tax rate applied in the third quarter of fiscal 2021 reflects its current income tax obligations. For the Nine Months Ended March 31, 2021 and 2020. The Corporation’s income tax provision was $1.5 million for the first nine months of fiscal 2021, a 41 percent decrease from $2.6 million in the same period last year, primarily reflecting lower net income before income taxes and tax benefits attributable to the exercise of stock options. The effective income tax rate for the nine months ended March 31, 2021 was 26.2 percent as compared to 29.6 percent for the nine months ended March 31, 2020. The Corporation believes that the effective income tax rate applied in the first nine months of fiscal 2021 reflects its current income tax obligations. Asset Quality Non-performing assets were comprised solely of non-performing loans at both March 31, 2021 and June 30, 2020. Non-performing loans, net of the allowance for loan losses and fair value adjustments, consisting of loans with collateral located in California, was $9.8 million at March 31, 2021, up 100 percent from $4.9 million at June 30, 2020. Non-performing loans as a percentage of loans held for investment at March 31, 2021 was 1.16%, up from 0.55% at June 30, 2020. The non-performing loans at March 31, 2021 are comprised of 29 single-family loans and one multi-family loan; while the non-performing loans at June 30, 2020 are comprised of 18 single-family loans and one commercial business loan. 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, 2021, total restructured loans increased 219 percent, to $8.3 million from $2.6 million at June 30, 2020. At March 31, 2021, a total $8.1 million or 97 percent of these restructured loans were classified as non-performing; while at June 30, 2020, all of these restructured loans were classified as non-performing. As of March 31, 2021, all of the restructured loans have a current payment status, consistent with their modified payment terms; this compares to $1.2 million, or 44 percent, of restructured loans that had a current payment status, consistent with their modified payment terms as of June 30, 2020. Restructured loans which are performing in accordance with their modified terms and not otherwise classified as 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. 58 There was no real estate owned at either March 31, 2021 or June 30, 2020. 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 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 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 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, 2021 At June 30, 2020 Loans on non-accrual status (excluding restructured loans): Mortgage loans: Single-family $ 896 $ 2,281 Multi-family 786 - Total 1,682 2,281 Accruing loans past due 90 days or more — — Restructured loans on non-accrual status: Mortgage loans: Single-family 8,077 2,612 Commercial business loans — 31 Total 8,077 2,643 Total non-performing loans 9,759 4,924 Real estate owned, net — — Total non-performing assets $ 9,759 $ 4,924 Non-performing loans as a percentage of loans held for investment, net of allowance for loan losses 1.16 % 0.55 % Non-performing loans as a percentage of total assets 0.82 % 0.42 % Non-performing assets as a percentage of total assets 0.82 % 0.42 % 59 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, 2021 At June 30, 2020 (Dollars In Thousands) Balance Count Balance Count Special mention loans: Mortgage loans: Single-family $ 1,752 4 $ 3,120 7 Multi-family 737 1 3,777 3 Commercial real estate — — 1,703 1 Total special mention loans 2,489 5 8,600 11 Substandard loans: Mortgage loans: Single-family 8,973 31 5,438 22 Multi-family 786 1 — — Commercial business loans — — 31 1 Total substandard loans 9,759 32 5,469 23 Total classified loans 12,248 37 14,069 34 Real estate owned — — — — Total classified assets $ 12,248 37 $ 14,069 34 Total classified assets as a percentage of total assets 1.03 % 1.20 % 60 Loan Volume Activities The following table is provided to disclose details related to the volume of loans originated and purchased for investment for the quarter and nine months indicated: For the Quarter Ended March 31, For the Nine Months Ended March 31, (In Thousands) 2021 2020 2021 2020 Loans originated for investment: Mortgage loans: Single-family $ 38,928 $ 9,654 $ 74,571 $ 25,221 Multi-family 21,208 10,390 48,024 44,661 Commercial real estate 830 5,570 2,690 14,468 Construction — 774 1,828 3,983 Consumer loans — — — 1 Total loans originated for investment 60,966 26,388 127,113 88,334 Loans purchased for investment: Mortgage loans: Single-family — — — 70,733 Multi-family — 2,460 11,463 44,829 Total loans purchased for investment — 2,460 11,463 115,562 Mortgage loan principal payments (75,719 ) (55,685 ) (201,617 ) (171,719 ) (Decrease) increase in other items, net (1) (59 ) (585 ) 519 2,205 Net (decrease) increase in loans held for investment $ (14,812 ) $ (27,422 ) $ (62,522 ) $ 34,382 (1) Includes net changes in undisbursed loan funds, deferred loan fees or costs, allowance for loan losses, fair value of loans held for investment, advance payments of escrows and repurchases. In addition to loans originated and purchased for investment discussed above, the Bank originated one single-family loan held for sale of $147,000 in the third quarter and first nine months of fiscal 2021 which was subsequently sold and settled. The Bank did not originate any loans held for sale in the third quarter and first nine months of fiscal 2020. 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 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 2021 and 2020, the Corporation originated and purchased loans held for investment of $138.6 million and $203.9 million, respectively. At March 31, 2021, the Corporation had loan origination commitments totaling $37.8 million, undisbursed lines of credit totaling $946,000 and undisbursed construction loan funds totaling $1.7 million. The Corporation 61 anticipates that it will have sufficient funds available to meet its current loan commitments. During the first nine months of fiscal 2021 and 2020, total loan repayments were $201.6 million and $171.7 million, respectively. The Corporation’s primary financing activity is gathering deposits. During the first nine months of fiscal 2021, the net increase in deposits was $40.8 million or five percent, due to an increase in transaction accounts, partly offset by a decrease in time deposits. Time deposits decreased $23.6 million, or 14 percent, to $146.4 million at March 31, 2021 from $170.0 million at June 30, 2020. At March 31, 2021, time deposits with a principal amount of $250,000 or less and scheduled to mature in one year or less were $69.5 million and total time deposits with a principal amount of more than $250,000 and scheduled to mature in one year or less were $10.7 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, 2021, total cash and cash equivalents were $71.6 million, or six 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, 2021, total borrowings were $111.0 million and the financing availability at FHLB – San Francisco was limited to 35 percent of total assets; the remaining borrowing facility available was $280.3 million and the remaining available collateral was $340.6 million. In addition, the Bank has secured a $219.7 million discount window facility at the Federal Reserve Bank of San Francisco, collateralized by investment securities with a fair market value of $233.7 million. As of March 31, 2021, 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, 2021 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, 2021. 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, 2021 increased to 30.5 percent from 23.1 percent for the quarter ended June 30, 2020. 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, 2021, the Bank exceeded all regulatory capital requirements. The Bank was categorized "well-capitalized" at March 31, 2021 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. 62 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, 2021 Tier 1 leverage capital (to adjusted average assets) $ 117,479 9.99 % $ 47,058 4.00 % $ 58,822 5.00 % CET1 capital (to risk-weighted assets) $ 117,479 18.77 % $ 43,819 7.00 % $ 40,689 6.50 % Tier 1 capital (to risk-weighted assets) $ 117,479 18.77 % $ 53,208 8.50 % $ 50,078 8.00 % Total capital (to risk-weighted assets) $ 125,312 20.02 % $ 65,728 10.50 % $ 62,598 10.00 % As of June 30, 2020 Tier 1 leverage capital (to adjusted average assets) $ 116,967 10.13 % $ 46,188 4.00 % $ 57,735 5.00 % CET1 capital (to risk-weighted assets) $ 116,967 17.51 % $ 46,747 7.00 % $ 43,408 6.50 % Tier 1 capital (to risk-weighted assets) $ 116,967 17.51 % $ 56,765 8.50 % $ 53,426 8.00 % Total capital (to risk-weighted assets) $ 125,316 18.76 % $ 70,121 10.50 % $ 66,782 10.00 % (1) Inclusive of the conservation buffer of 2.50% for CET1 capital, Tier 1 capital and Total capital ratios. In addition to the minimum CET1, Tier 1 and Total capital ratios, the Bank must maintain a capital conservation buffer consisting of additional CET1 capital above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. As of March 31, 2021, the capital conservation buffer required a minimum of 2.50% of risk weighted assets. 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 2021, the Bank paid a cash dividend of $5.0 million to the Corporation, while the Corporation paid $3.1 million of cash dividends to its shareholders. Supplemental Information At March 31, 2021 At June 30, 2020 At March 31, 2020 Loans serviced for others (in thousands) $57,422 $86,505 $94,948 Book value per share $16.73 $16.67 $16.56 63