PROVIDENT FINANCIAL HOLDINGS INC 10-K

Item 9A. Controls and Procedures a) An evaluation of the Corporation’s disclosure controls and procedures (as defined in Section 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934 (the “Act”)) was carried out under the supervision and with the participation of the Corporation’s Chief Executive Officer, Chief Financial Officer and the Corporation’s Disclosure Committee as of the end of the period covered by this report. In designing and evaluating the Corporation’s disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Also, because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been detected. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures as of June 30, 2020 are effective, at the reasonable assurance level, in ensuring that the information required to be disclosed by the Corporation in the reports it files or submits under the Act is (i) accumulated and communicated to the Corporation’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. b) There have been no changes in the Corporation’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the fiscal year ended June 30, 2020, that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting. The Corporation does not expect that its internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected. 77 Management Report on Internal Control Over Financial Reporting This management report includes the subsidiary institution of Provident Financial Holdings, Inc. (the "Corporation"), Provident Savings Bank, F.S.B. which is subject to Part 363 in the statement of management's responsibilities; the report on management's assessment of compliance with the Federal laws and regulations pertaining to insider loans and the Federal and, if applicable, State laws and regulations pertaining to dividend restrictions; and the report on management's assessment of internal control over financial reporting. Management of the Corporation is responsible for preparing the Corporation’s annual consolidated financial statements in accordance with generally accepted accounting principles; for establishing and maintaining an adequate internal control structure and procedures for financial reporting, including controls over the preparation of regulatory financial statements in accordance with the instructions for the Parent Company Only Financial Statements for Small Holding Companies (Form FR Y-9SP); and for complying with the Federal laws and regulations pertaining to insider loans and the Federal and, if applicable, State laws and regulations pertaining to dividend restrictions. The Corporation's internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. To comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, the Corporation designed and implemented a structured and comprehensive assessment process to evaluate its internal control over financial reporting across the enterprise. The assessment of the effectiveness of the Corporation's internal control over financial reporting was based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management's assessment of the Corporation's internal control over financial reporting was also conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), which include controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for the Parent Company Only Financial Statements for Small Holding Companies (Form FR Y-9SP). Because of its inherent limitations, including the possibility of human error and the circumvention of overriding controls, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on its assessment, management has concluded that, as of June 30, 2020, the Corporation's internal control over financial reporting, including controls over the preparation of regulatory financial statements in accordance with the instructions for the Parent Company Only Financial Statements for Small Holding Companies (Form FR Y-9SP), is effective based on the criteria established in Internal Control-Integrated Framework (2013). Management of the Corporation has assessed the Corporation's compliance with the Federal laws and regulations pertaining to insider loans and the Federal and, if applicable, State laws and regulations pertaining to dividend restrictions during the fiscal year ended on June 30, 2020. Management has concluded that the Corporation complied with the Federal laws and regulations pertaining to insider loans and the Federal and, if applicable, State laws and regulations pertaining to dividend restrictions during the fiscal year ended on June 30, 2020. Date: September 4, 2020 /s/ Craig G. Blunden Craig G. Blunden Chairman and Chief Executive Officer /s/ Donavon P. Ternes Donavon P. Ternes President, Chief Operating Officer and Chief Financial Officer 78 Item 9B. Other Information Not applicable. PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this item regarding the Corporation’s Board of Directors is incorporated herein by reference from the section captioned “Proposal I – Election of Directors” in the Corporation’s Proxy Statement, a copy of which will be filed with the Securities and Exchange Commission no later than 120 days after the Corporation’s fiscal year end. The executive officers of the Corporation and the Bank are elected annually and hold office until their respective successors have been elected and qualified or until death, resignation or removal by the Board of Directors. For information regarding the Corporation’s executive officers, see Item 1, “Business - Executive Officers” in this Form 10-K. Code of Ethics for Senior Financial Officers The Corporation has adopted a Code of Ethics, which applies to all directors, officers, and employees of the Corporation. The Code of Ethics is publicly available as Exhibit 14 to the Corporation’s Annual Report on Form 10-K for the fiscal year June 30, 2007, and is available on the Corporation’s website, www.myprovident.com . If the Corporation makes any substantial amendments to the Code of Ethics or grants any waiver, including any implicit waiver, from a provision of the Code to the Corporation’s Chief Executive Officer, Chief Financial Officer or Controller, the Corporation will disclose the nature of such amendment or waiver on the Corporation’s website and in a report on Form 8-K. Audit Committee and Audit Committee Financial Expert The Corporation has a separately-designated standing audit committee established in accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The audit committee consists of three independent directors of the Corporation: Joseph P. Barr, Judy A. Carpenter and Debbi H. Guthrie. The Corporation has designated Joseph P. Barr, Audit Committee Chairman, as its audit committee financial expert. Mr. Barr is independent, as independence for audit committee members is defined under the listing standards of the NASDAQ Stock Market, a Certified Public Accountant in California and Ohio and has been practicing public accounting for over 40 years. Nominating Procedures There have been no material changes to the procedures by which shareholders may recommend nominees to its Board of Directors since last disclosed to shareholders. Item 11. Executive Compensation The information required by this item is incorporated herein by reference from the sections captioned “Executive Compensation” and “Directors’ Compensation” in the Proxy Statement, a copy of which will be filed with the Securities and Exchange Commission no later than 120 days after the Corporation’s fiscal year end. 79 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters (a) Security Ownership of Certain Beneficial Owners. The information required by this item is incorporated herein by reference from the section captioned “Security Ownership of Certain Beneficial Owners and Management” in the Corporation’s Proxy Statement, a copy of which will be filed with the Securities and Exchange Commission no later than 120 days after the Corporation’s fiscal year end. (b) Security Ownership of Management. The information required by this item is incorporated herein by reference from the sections captioned “Security Ownership of Certain Beneficial Owners and Management” and “Proposal 1 - Election of Directors” in the Corporation’s Proxy Statement, a copy of which will be filed with the Securities and Exchange Commission no later than 120 days after the Corporation’s fiscal year end. (c) Changes in Control. The Corporation is not aware of any arrangements, including any pledge by any person of securities of the Corporation, the operation of which may at a subsequent date result in a change in control of the Corporation. (d) Equity Compensation Plan Information. The following table summarizes share and exercise price information regarding the Corporation's equity compensation plans as of June 30, 2020: Plan Category Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (a) (b) (c) Equity compensation plans approved by security holders: 2006 Equity Incentive Plan: Stock Options 33,500 $15.69 — Restricted Stock 1,500 N/A — 2010 Equity Incentive Plan: Stock Options 312,000 $12.14 — Restricted Stock 6,750 N/A — 2013 Equity Incentive Plan: Stock Options 209,000 $16.70 57,500 Restricted Stock 217,250 N/A 51,250 Equity compensation plans not approved by security holders N/A N/A N/A Total 780,000 $14.07 (1) 108,750 (1) Excludes restricted stock from the calculation since restricted stock awards do not contain an exercise price requirement. 80 Item 13. Certain Relationships and Related Transactions, and Director Independence Certain Relationships and Related Transactions. The information required by this item is incorporated herein by reference from the section captioned “Board of Directors’ Meetings, Board Committees and Corporate Governance Matters - Corporate Governance - Certain Relationships and Related Transactions” in the Corporation’s Proxy Statement, a copy of which will be filed with the Securities and Exchange Commission no later than 120 days after the Corporation’s fiscal year end. Director Independence. The information contained in the section captioned “Board of Directors’ Meetings, Board Committees and Corporate Governance Matters - Corporate Governance - Director Independence” in the Proxy Statement is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information required by this item is incorporated herein by reference from the section captioned “Proposal 3 - Ratification of Appointment of Independent Auditor” in the Corporation’s Proxy Statement, a copy of which will be filed with the Securities and Exchange Commission no later than 120 days after the Corporation’s fiscal year end. PART IV Item 15. Exhibits, Financial Statement Schedules. (a) 1. Financial Statements See Exhibit 13 to Consolidated Financial Statements beginning on this Form 10-K. 2. Financial Statement Schedules Schedules to the Consolidated Financial Statements have been omitted as the required information is inapplicable. (b) Exhibits Exhibits are available from the Corporation by written request 3.1 (a) Amended and Restated Certificate of Incorporation of Provident Financial Holdings, Inc. as filed with the Delaware Secretary of State on November 24, 2009 (incorporated by reference to Exhibit 3.1 to the Corporation’s Quarterly Report on Form 10-Q filed on November 9, 2010) 3.1 (b) Amended and Restated Bylaws of Provident Financial Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Corporation’s Current Report on Form 8-K filed on December 1, 2014) 4.1 Form of Certificate of Provident's Common Stock (incorporated by reference to the Corporation’s Registration Statement on Form S-1 (333-2230) filed on March 11, 1996)) 4.2 Description of Capital Stock of Provident Financial Holdings, Inc. (incorporated by reference to Exhibit 4.2 to the Corporation’s Annual Report on Form 10-K for the year ended June 30, 2019) 10.1 Employment Agreement with Craig G. Blunden (incorporated by reference to Exhibit 10.1 to the Corporation’s Form 8-K dated December 19, 2005) 10.2 Post-Retirement Compensation Agreement with Craig G. Blunden (incorporated by reference to Exhibit 10.2 to the Corporation’s Form 8-K dated December 19, 2005) 81 10.3 Post-Retirement Compensation Agreement with Donavon P. Ternes (incorporated by reference to Exhibit 10.1 to the Corporation’s Form 8-K dated July 7, 2009) 10.4 Form of Severance Agreement with Deborah L. Hill, Robert "Scott" Ritter, Lilian Salter, Donavon P. Ternes, David S. Weiant and Gwendolyn L. Wertz (incorporated by reference to Exhibit 10.1 and 10.2 in the Corporation’s Form 8-K dated February 24, 2012) 10.5 2006 Equity Incentive Plan (incorporated by reference to Exhibit A to the Corporation’s proxy statement dated October 12, 2006) 10.6 Form of Incentive Stock Option Agreement for options granted under the 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.10 in the Corporation’s Form 10-Q for the quarter ended December 31, 2006) 10.7 Form of Non-Qualified Stock Option Agreement for options granted under the 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.11 in the Corporation’s Form 10-Q for the quarter ended December 31, 2006) 10.8 Form of Restricted Stock Agreement for restricted shares awarded under the 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.12 in the Corporation’s Form 10-Q for the quarter ended December 31, 2006) 10.9 2010 Equity Incentive Plan (incorporated by reference to Exhibit A to the Corporation’s proxy statement dated October 28, 2010) 10.10 Form of Incentive Stock Option Agreement for options granted under the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 in the Corporation’s Form 8-K dated November 30, 2010) 10.11 Form of Non-Qualified Stock Option Agreement for options granted under the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 in the Corporation’s Form 8-K dated November 30, 2010) 10.12 Form of Restricted Stock Agreement for restricted shares awarded under the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 in the Corporation’s Form 8-K dated November 30, 2010) 10.13 2013 Equity Incentive Plan (incorporated by reference to Exhibit A to the Corporation’s proxy statement dated October 24, 2013) 10.14 Form of Incentive Stock Option Agreement for options granted under the 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 in the Corporation’s Registration Statement on Form S-8 (333-192727) dated December 9, 2013) 10.15 Form of Non-Qualified Stock Option Agreement for options granted under the 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 in the Corporation’s Registration Statement on Form S-8 (333-192727) dated December 9, 2013) 10.16 Form of Restricted Stock Agreement for restricted shares awarded under the 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 in the Corporation’s Registration Statement on Form S-8 (333-192727) dated December 9, 2013) 13 2020 Annual Report to Stockholders 82 14.0 Code of Ethics for the Corporation’s directors, officers and employees (Registrant elects to satisfy Regulation S-K §229.406(c) by posting its Code of Ethics on its website at www.myprovident.com in the section titled About: Investor Relations. 21.1 Subsidiaries of the Registrant 23.1 Consent of Independent Registered Public Accounting Firm 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101 The following materials from the Corporation’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020, formatted in Extensible Business Reporting Language (XBRL): (1) Consolidated Statements of Financial Condition; (2) Consolidated Statements of Operations; (3) Consolidated Statements of Comprehensive Income; (4) Consolidated Statements of Stockholders’ Equity; (5) Consolidated Statements of Cash Flows; and (6) Selected Notes to Consolidated Financial Statements. 83 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: September 4, 2020 Provident Financial Holdings, Inc. /s/ Craig G. Blunden Craig G. Blunden Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURES TITLE DATE /s/ Craig G. Blunden Chairman and September 4, 2020 Craig G. Blunden Chief Executive Officer (Principal Executive Officer) /s/ Donavon P. Ternes President, Chief Operating Officer September 4, 2020 Donavon P. Ternes and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Joseph P. Barr Director September 4, 2020 Joseph P. Barr /s/ Bruce W. Bennett Director September 4, 2020 Bruce W. Bennett /s/ Judy A. Carpenter Director September 4, 2020 Judy A. Carpenter /s/ Debbi H. Guthrie Director September 4, 2020 Debbi H. Guthrie /s/ Roy H. Taylor Director September 4, 2020 Roy H. Taylor /s/ William E. Thomas Director September 4, 2020 William E. Thomas 84 Provident Financial Holdings, Inc. Consolidated Financial Statements Index Page Report of Independent Registered Public Accounting Firm 86 Consolidated Statements of Financial Condition as of June 30, 2020 and 2019 87 Consolidated Statements of Operations for the years ended June 30, 2020 and 2019 88 Consolidated Statements of Comprehensive Income for the years ended June 30, 2020 and 2019 89 Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2020 and 2019 90 Consolidated Statements of Cash Flows for the years ended June 30, 2020 and 2019 91 Notes to Consolidated Financial Statements 93 85 Report of Independent Registered Public Accounting Firm REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Provident Financial Holdings, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated statements of financial condition of Provident Financial Holdings, Inc. and subsidiary (the “Corporation”) as of June 30, 2020 and 2019, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows, for each of the two years in the period ended June 30, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Corporation as of June 30, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on the Corporation’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/Deloitte & Touche LLP Costa Mesa, California September 4, 2020 We have served as the Corporation's auditor since 2001. 86 PROVIDENT FINANCIAL HOLDINGS, INC. Consolidated Statements of Financial Condition (In Thousands, Except Share Information) June 30, 2020 June 30, 2019 Assets Cash and cash equivalents $ 116,034 $ 70,632 Investment securities - held to maturity, at cost 118,627 94,090 Investment securities – available for sale, at fair value 4,717 5,969 Loans held for investment, net of allowance for loan losses of $8,265 and $7,076, respectively; includes $2,258 and $5,094 of loans held at fair value, respectively) 902,796 879,925 Accrued interest receivable 3,271 3,424 Federal Home Loan Bank (“FHLB”) – San Francisco stock 7,970 8,199 Premises and equipment, net 10,254 8,226 Prepaid expenses and other assets 13,168 14,385 Total assets $ 1,176,837 $ 1,084,850 Liabilities and Stockholders’ Equity Liabilities: Non interest-bearing deposits $ 118,771 $ 90,184 Interest-bearing deposits 774,198 751,087 Total deposits 892,969 841,271 Borrowings 141,047 101,107 Accounts payable, accrued interest and other liabilities 18,845 21,831 Total liabilities 1,052,861 964,209 Commitments and Contingencies (Note 14) Stockholders’ equity: Preferred stock, $0.01 par value (2,000,000 shares authorized; none issued and outstanding) — — Common stock, $0.01 par value (40,000,000 shares authorized; 18,097,615 and 18,081,365 shares issued; 7,436,315 and 7,486,106 shares outstanding, respectively) 181 181 Additional paid-in capital 95,593 94,351 Retained earnings 194,345 190,839 Treasury stock at cost (10,661,300 and 10,595,259 shares, respectively) (166,247 ) (164,891 ) Accumulated other comprehensive income, net of tax 104 161 Total stockholders’ equity 123,976 120,641 Total liabilities and stockholders’ equity $ 1,176,837 $ 1,084,850 The accompanying notes are an integral part of these consolidated financial statements. 87 PROVIDENT FINANCIAL HOLDINGS, INC. Consolidated Statements of Operations Year Ended June 30, (In Thousands, Except Per Share Information) 2020 2019 Interest income: Loans receivable, net $ 39,145 $ 40,092 Investment securities 2,120 2,042 FHLB – San Francisco stock 534 707 Interest-earning deposits 657 1,537 Total interest income 42,456 44,378 Interest expense: Deposits 2,943 3,381 Borrowings 3,112 2,827 Total interest expense 6,055 6,208 Net interest income 36,401 38,170 Provision (recovery) for loan losses 1,119 (475 ) Net interest income, after provision (recovery) for loan losses 35,282 38,645 Non-interest income: Loan servicing and other fees 819 1,051 (Loss) gain on sale of loans, net (132 ) 7,135 Deposit account fees 1,610 1,928 Card and processing fees 1,454 1,568 Other 769 829 Total non-interest income 4,520 12,511 Non-interest expense: Salaries and employee benefits (1) 18,913 30,149 Premises and occupancy (2) 3,465 5,038 Equipment expense (3) 1,129 2,474 Professional expense 1,439 1,864 Sales and marketing expense 773 980 Deposit insurance premium and regulatory assessments 227 590 Other 2,954 4,141 Total non-interest expense 28,900 45,236 Income before income taxes 10,902 5,920 Provision for income taxes 3,213 1,503 Net income $ 7,689 $ 4,417 Basic earnings per share $ 1.03 $ 0.59 Diluted earnings per share $ 1.01 $ 0.58 Cash dividends per share $ 0.56 $ 0.56 (1) Includes $1.7 million of non-recurring expenses related to scaling back origination of saleable single-family mortgage loans for the fiscal year ended June 30, 2019. (2) Includes $0.3 million of non-recurring expenses related to scaling back the origination of saleable single-family mortgage loans for the fiscal year ended June 30, 2019. (3) Includes $0.8 million of non-recurring expenses related to scaling back the origination of saleable single-family mortgage loans for the fiscal year ended June 30, 2019. The accompanying notes are an integral part of these consolidated financial statements. 88 PROVIDENT FINANCIAL HOLDINGS, INC. Consolidated Statements of Comprehensive Income Year Ended June 30, (In Thousands) 2020 2019 Net income $ 7,689 $ 4,417 Change in unrealized holding losses on securities available for sale and interest-only strips (81 ) (70 ) Reclassification of losses to net income — — Other comprehensive loss, before income tax benefit (81 ) (70 ) Income tax benefit (24 ) (21 ) Other comprehensive loss (57 ) (49 ) Total comprehensive income $ 7,632 $ 4,368 The accompanying notes are an integral part of these consolidated financial statements. 89 PROVIDENT FINANCIAL HOLDINGS, INC. Consolidated Statements of Stockholders' Equity Common Stock Additional Paid-In Retained Treasury Accumulated Other Compre- hensive Income (Loss), (In Thousands, Except Share Information) Shares Amount Capital Earnings Stock Net of Tax Total Balance at June 30, 2018 7,421,426 $ 181 $ 94,957 $ 190,616 $ (165,507 ) $ 210 $ 120,457 Net income 4,417 4,417 Other comprehensive loss (49 ) (49 ) Purchase of treasury stock (1) (73,070 ) (1,412 ) (1,412 ) Distribution of restricted stock 89,500 — Amortization of restricted stock 515 515 Award of restricted stock (2,028 ) 2,028 — Exercise of stock options 48,250 553 553 Stock options expense 354 354 Cash dividends (2) (4,194 ) (4,194 ) Balance at June 30, 2019 7,486,106 $ 181 $ 94,351 $ 190,839 $ (164,891 ) $ 161 $ 120,641 Net income 7,689 7,689 Other comprehensive loss (57 ) (57 ) Purchase of treasury stock (66,041 ) (1,283 ) (1,283 ) Forfeiture of restricted stock 73 (73 ) — Amortization of restricted stock 873 873 Exercise of stock options 16,250 215 215 Stock options expense 81 81 Cash dividends (2) (4,183 ) (4,183 ) Balance at June 30, 2020 7,436,315 $ 181 $ 95,593 $ 194,345 $ (166,247 ) $ 104 $ 123,976 (1) Includes the purchase of 21,071 shares of distributed restricted stock in fiscal 2019 in settlement of employees' withholding tax obligations. (2) Cash dividends of $0.56 per share were paid in both fiscal 2020 and 2019. The accompanying notes are an integral part of these consolidated financial statements. 90 PROVIDENT FINANCIAL HOLDINGS, INC. Consolidated Statements of Cash Flows Year Ended June 30, (In Thousands) 2020 2019 Cash flows from operating activities: Net income $ 7,689 $ 4,417 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,391 3,075 Provision (recovery) for loan losses 1,119 (475 ) Loss (gain) on sale of loans, net 132 (7,135 ) Stock-based compensation 954 869 Provision for deferred income taxes 552 650 (Decrease) increase in accounts payable, accrued interest and other liabilities (3,086 ) 1,865 (Increase) decrease in prepaid expenses and other assets (2,797 ) 765 Loans originated for sale — (467,094 ) Proceeds from sale of loans — 570,154 Net cash provided by operating activities 7,954 107,091 Cash flows from investing activities: (Increase) decrease in loans held for investment, net (25,108 ) 22,479 Purchase of investment securities - held to maturity (56,262 ) (40,682 ) Maturity of investment securities - held to maturity 400 800 Principal payments from investment securities - held to maturity 30,890 32,765 Principal payments from investment securities - available for sale 1,173 1,463 Proceeds from redemption of FHLB – San Francisco stock 229 — Proceeds from sale of real estate owned — 915 Purchase of premises and equipment (229 ) (449 ) Net cash (used for) provided by investing activities (48,907 ) 17,291 (Continued) The accompanying notes are an integral part of these consolidated financial statements. 91 PROVIDENT FINANCIAL HOLDINGS, INC. Consolidated Statements of Cash Flows Year Ended June 30, (In Thousands) 2020 2019 Cash flows from financing activities: Increase (decrease) in deposits, net 51,698 (66,327 ) Proceeds from long-term borrowings 30,007 — Repayments of long-term borrowings (67 ) (10,056 ) Proceeds (repayments) of short-term borrowings, net 10,000 (15,000 ) Treasury stock purchases (1,283 ) (1,412 ) Proceeds from exercise of stock options 215 553 Withholding taxes on stock-based compensation (32 ) (615 ) Cash dividends (4,183 ) (4,194 ) Net cash provided by (used for) financing activities 86,355 (97,051 ) Net increase in cash and cash equivalents 45,402 27,331 Cash and cash equivalents at beginning of year 70,632 43,301 Cash and cash equivalents at end of year $ 116,034 $ 70,632 Supplemental information: Cash paid for interest $ 6,056 $ 6,221 Cash paid for income taxes $ 775 $ 1,555 Transfer of loans held for sale to held for investment $ 1,085 $ 1,909 The accompanying notes are an integral part of these consolidated financial statements. 92 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 Note 1: Organization and Summary of Significant Accounting Policies Basis of presentation The consolidated financial statements include the accounts of Provident Financial Holdings, Inc., and its wholly owned subsidiary, Provident Savings Bank, F.S.B. (collectively, the “Corporation”). All inter-company balances and transactions have been eliminated. Provident Savings Bank, F.S.B. (the “Bank”) converted from a federally chartered mutual savings bank to a federally chartered stock savings bank effective June 27, 1996. Provident Financial Holdings, Inc., a Delaware corporation organized by the Bank, acquired all of the capital stock of the Bank issued in the conversion; the transaction was recorded on a book value basis. The Corporation has determined that it operates in one 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 for investment/its loan portfolio. Deposits are collected primarily from 13 banking locations located in Riverside and San Bernardino counties in California. Additional activities include originating saleable single-family loans, primarily fixed-rate first mortgages. Loans are primarily originated and purchased in Southern and Northern California. Use of estimates The accounting and reporting policies of the Corporation conform to generally accepted accounting principles in the United States of America (“GAAP”). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the loan repurchase reserve, the valuation of investment securities, the valuation of loans held for investment at fair value, deferred tax assets, loan servicing assets, real estate owned and deferred compensation costs. The following accounting policies, together with those disclosed elsewhere in the consolidated financial statements, represent the significant accounting policies of Provident Financial Holdings, Inc. and the Bank. Cash and cash equivalents Cash and cash equivalents include cash on hand and due from banks, as well as overnight deposits placed at the Federal Reserve Bank – San Francisco and correspondent banks. Investment securities The Corporation classifies its qualifying investments as available for sale or held to maturity. The Corporation classifies investments as held to maturity when it has the ability and it is management’s positive intent to hold such securities to maturity. Securities held to maturity are carried at amortized historical cost. All other securities are classified as available for sale and are carried at fair value. Fair value generally is determined based upon quoted market prices. Changes in net unrealized gains (losses) on securities available for sale are included in accumulated other comprehensive income, net of tax. Gains and losses on sale or dispositions of investment securities are included in non-interest income and are determined using the specific identification method. Purchase premiums and discounts are amortized over the expected average life of the securities using the effective interest method. 93 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 Investment securities are reviewed annually for possible other-than-temporary impairment (“OTTI”). For debt securities, an OTTI is evident if the Corporation intends to sell the debt security or will more likely than not be required to sell the debt security before full recovery of the entire amortized cost basis is realized. However, even if the Corporation does not intend to sell the debt security and will not likely be required to sell the debt security before recovery of its entire amortized cost basis, the Corporation must evaluate expected cash flows to be received and determine if a credit loss has occurred. In the event of a credit loss, the credit component of the impairment is recognized within non-interest income and the non-credit component is recognized through accumulated other comprehensive income, net of tax. Loans held for investment Loans held for investment consist of long-term adjustable rate loans secured by first trust deeds on single-family residences. Additionally, multi-family and commercial real estate loans secured by commercial property, land and other residential properties have become a substantial part of loans held for investment and comprised 66% and 63% of total loans held for investment at June 30, 2020 and 2019, respectively. These loans are generally offered to customers and businesses located in California. Net loan origination fees and certain direct origination expenses are deferred and amortized to interest income over the contractual life of the loan using the effective interest method. Amortization is discontinued for non-performing loans. Interest receivable represents, for the most part, the current month’s interest, which will be included as a part of the borrower’s next monthly loan payment. Interest receivable is accrued only if deemed collectible. Loans are placed on non-performing status when they become 90 days past due or if the loan is deemed impaired. When a loan is placed on non-performing status, interest accrued but not received is reversed against interest income. Interest income on non-performing loans is subsequently recognized only to the extent that cash is received and the principal balance is deemed collectible. If the principal balance is not deemed collectible, the entire payment received (principal and interest) is applied to the outstanding loan balance. Non-performing loans that become current as to both principal and interest are returned to accrual status after demonstrating satisfactory payment history (usually six consecutive months) and when future payments are expected to be collected. Allowance for loan losses The allowance for loan losses involves significant judgment and assumptions by management, which has a material impact on the carrying value of net loans. Management considers the accounting estimate related to the allowance for loan losses a critical accounting estimate because it is highly susceptible to changes from period to period, requiring management to make assumptions about probable incurred losses inherent in the loan portfolio at the balance sheet date. The impact of a sudden large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings. The allowance is based on two principles of accounting: (i) ASC 450, “Contingencies,” which requires that losses be accrued when they are probable of occurring and can be estimated; and (ii) ASC 310, “Receivables,” which requires that losses be accrued for non-performing loans that may be determined on an individually evaluated basis or based on an aggregated pooling method. The allowance has two components: collectively evaluated allowances and individually evaluated allowances. Each of these components is based upon estimates that can change over time. The allowance is based on historical experience and, as a result, can differ from actual losses incurred in the future. Additionally, differences may result from qualitative factors such as unemployment data, gross domestic product, interest rates, retail sales, the value of real estate and real estate market conditions. The historical data is reviewed at least quarterly and adjustments are made as needed. Management considers, based on currently available information, the allowance for loan losses sufficient to absorb probable losses inherent in loans held for investment. Various techniques are used to arrive at an individually evaluated allowance, including discounted cash 94 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 flows and the fair market value of collateral. The use of these techniques is inherently subjective and the actual losses could be greater or less than the estimates. Loans originated and held for sale Mortgage loans are originated for both investment and sale to the secondary market. Since the Corporation is primarily a single-family adjustable-rate mortgage (“ARM”) lender for its own loan portfolio, fixed-rate loans are originated for sale to institutional investors. Loans held for sale consist primarily of long-term fixed-rate loans secured by first trust deeds on single-family residences, the majority of which are Federal Housing Administration (“FHA”), United States Department of Veterans Affairs (“VA”), Fannie Mae and Freddie Mac loan products. The loans are generally offered to customers located in (a) Southern California, primarily in Riverside and San Bernardino counties, commonly known as the Inland Empire, and Orange, Los Angeles, San Diego and other surrounding counties and (b) Northern California, primarily Alameda, Placer, San Luis Obispo and other surrounding counties. The loans have been hedged with loan sale commitments, TBA MBS trades and option contracts. The loan sale settlement period is generally between 20 to 30 days from the date of the loan funding. On February 4, 2019, the Corporation announced that it was its best interests to scale back the saleable single-family mortgage loan originations and focus on increasing the portfolio single-family mortgage loans. The Corporation adopted Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” and elected the fair value option (ASC 825, “Financial Instruments”) on loans held for sale. ASC 825 allows for the option to report certain financial assets and liabilities at fair value initially and at subsequent measurement dates with changes in fair value included in earnings. The option may be applied instrument by instrument, but it is irrevocable. The Corporation has elected the fair value option on loans held for sale and believes the fair value option most closely aligns the timing of the recognition of non-interest income and non-interest expense. Fair value is generally determined by measuring the value of outstanding loan sale commitments in comparison to investors’ current yield requirements as calculated on the aggregate loan basis. Loans are generally sold without recourse, other than standard representations and warranties. A high percentage of loans are sold on a servicing released basis. In some transactions, the Corporation may retain the servicing rights in order to generate servicing income. Where the Corporation continues to service loans after sale, investors are paid their share of the principal collections together with interest at an agreed-upon rate, which generally differs from the loan’s contractual interest rate. Loans previously sold to the FHLB – San Francisco under the Mortgage Partnership Finance (“MPF”) program have a recourse liability. The FHLB – San Francisco absorbs the first four basis points of loss by establishing a first loss account and a credit scoring process is used to calculate the maximum recourse amount for the Bank. All losses above the Bank’s maximum recourse are the responsibility of the FHLB – San Francisco. The FHLB – San Francisco pays the Bank a credit enhancement fee on a monthly basis to compensate the Bank for accepting the recourse obligation. As of June 30, 2020, the Bank serviced $7.4 million of loans under this program and has established a recourse liability of $70,000 as compared to $9.7 million of loans serviced and a recourse liability of $50,000 at June 30, 2019. Occasionally, the Bank is required to repurchase loans sold to Freddie Mac, Fannie Mae or other investors if it is determined that such loans do not meet the credit requirements of the investor, or if one of the parties involved in the loan misrepresented pertinent facts, committed fraud, or if such loans were 90-days past due within 120 days of the loan funding date. During the years ended June 30, 2020 and 2019, the Bank repurchased $1.1 million and $948,000 of single-family loans, respectively. No other repurchase requests, which did not result in the repurchase of the loan itself, were settled in fiscal 2020 and 2019. In addition to the specific recourse liability for the MPF program, the Bank established a recourse liability of $200,000 for loans sold to other investors as of both, June 30, 2020 and 2019. 95 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 Activity in the recourse liabilities for the years ended June 30, 2020 and 2019 was as follows: For Year Ended June 30, (In Thousands) 2020 2019 Balance, beginning of year $ 250 $ 283 Recourse reserve (recovery) 20 (33 ) Balance, end of the year $ 270 $ 250 The Bank is obligated to refund loan sale premiums to investors when a loan pays off within a specific time period following the loan sale; the time period ranges from three to six months, depending upon the loan sale agreement. Total loan sale premium refunds in fiscal 2020 and 2019 were $78,000 and $96,000, respectively. The Bank has no estimated liability for future loan sale premium refunds at June 30, 2020, as compared to $25,000 at June 30, 2019. Gains or losses on the sale of loans, including fees received or paid, are recognized at the time of sale and are determined by the difference between the net sales proceeds and the allocated book value of the loans sold. Mortgage servicing assets (“MSA”) are amortized in proportion to and over the period of the estimated net servicing income and are carried at the lower of cost or fair value. The fair value of MSA is based on the present value of estimated net future cash flows related to contractually specified servicing fees. The Bank periodically evaluates MSA for impairment, which is measured as the excess of cost over fair value. For additional information, see Note 4 of the Notes to Consolidated Financial Statements, “Mortgage Loan Servicing and Loans Originated for Sale.” Allowance for unfunded loan commitments The Corporation maintains the allowance for unfunded loan commitments at a level that is adequate to absorb estimated probable losses related to these unfunded credit facilities. The Corporation determines the adequacy of the allowance based on periodic evaluations of the unfunded credit facilities, including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities. The allowance for unfunded loan commitments is recorded in other liabilities on the Consolidated Statements of Financial Condition. Net adjustments to the allowance for unfunded loan commitments are included in other non-interest expense on the Consolidated Statements of Operations. Loans in forbearance 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 Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (“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. 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. 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 96 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 in full at an earlier date. 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. Troubled debt restructuring (“restructured loans”) A restructured loan is a loan which the Corporation, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Corporation would not otherwise consider. These financial difficulties include, but are not limited to, the borrowers default status on any of their debts, bankruptcy and recent changes in their financial circumstances (loss of job, etc.). The loan terms which have been modified or restructured due to a borrower’s financial difficulty, may include but are not limited to: a) A reduction in the stated interest rate. b) An extension of the maturity at an interest rate below market. c) A reduction in the accrued interest. d) Extensions, deferrals, renewals and rewrites. e) Loans that have been discharged in a Chapter 7 Bankruptcy that have not been reaffirmed by the borrower. To qualify for restructuring, a borrower must provide evidence of creditworthiness such as, current financial statements, most recent income tax returns, current paystubs, current W-2s, and most recent bank statements, among other documents, which are then verified by the Corporation. The Corporation re-underwrites the loan with the borrower's updated financial information, new credit report, current loan balance, new interest rate, remaining loan term, updated property value and modified payment schedule, among other considerations, to determine if the borrower qualifies. The Corporation measures the allowance for loan losses of restructured loans based on the difference between the loan's original carrying amount and the present value of expected future cash flows discounted at the original effective yield of the loan. Based on the Office of the Comptroller of the Currency's ("OCC") guidance with respect to restructured loans and to conform to general practices within the banking industry, the Corporation maintains certain restructured loans on accrual status, provided there is reasonable assurance of repayment and performance, consistent with the modified terms based upon a current, well-documented credit evaluation. Other restructured loans are classified as “Substandard” and placed on non-performing status. The Corporation upgrades restructured single-family loans to the pass category if the borrower has demonstrated satisfactory contractual payments for at least six consecutive months or 12 consecutive months for those loans that were restructured more than once. Once the borrower has demonstrated satisfactory contractual payments beyond 12 consecutive months, the loan is no longer categorized as a restructured loan. In addition to the payment history described above; multi-family, commercial real estate, construction and commercial business loans must also demonstrate a combination of corroborating characteristics to be upgraded, such as: satisfactory cash flow, satisfactory guarantor support, and additional collateral support, among others. Non-performing loans The Corporation assesses loans individually and classifies as non-performing loans when the accrual of interest has been discontinued, loans have been restructured or management has serious doubts about the future collectability of principal and interest, even though the loans may currently be performing. Factors considered in determining classification include, but are not limited to, expected future cash flows, the financial condition of the borrower and current economic conditions. The 97 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 Corporation measures each non-performing loan based on ASC 310, establishes a collectively evaluated or individually evaluated allowance and charges off those loans or portions of loans deemed uncollectible. Real estate owned Real estate acquired through foreclosure is initially recorded at the fair value of the real estate acquired, less estimated selling costs. Subsequent to foreclosure, the Corporation charges current earnings for estimated losses if the carrying value of the property exceeds its fair value. Gains or losses on the sale of real estate are recognized upon disposition of the property. Costs relating to improvement, maintenance and repairs of the property are expensed as incurred under gain (loss) on sale and operations of real estate owned acquired in the settlement of loans within the Consolidated Statements of Operations. Impairment of long-lived assets The Corporation reviews its long-lived assets for impairment annually or when events or circumstances indicate that the carrying amount of these assets may not be recoverable. Long-lived assets include buildings, land, fixtures, furniture and equipment. An asset is considered impaired when the expected discounted cash flows over the remaining useful life are less than the net book value. When impairment is indicated for an asset, the amount of impairment loss is the excess of the net book value over its fair value. Premises and equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed primarily on a straight-line basis over the estimated useful lives as follows: Buildings 10 to 40 years Furniture and fixtures 3 to 10 years Automobiles 3 to 5 years Computer equipment 3 to 5 years Leasehold improvements are amortized over the lesser of their respective lease terms or the useful life of the improvement, which ranges from one to 10 years. Maintenance and repair costs are charged to operations as incurred. Income taxes The Corporation accounts for income taxes in accordance with ASC 740, “Income Taxes.” ASC 740 requires the affirmative evaluation that it is more likely than not, based on the technical merits of a tax position, that an enterprise is entitled to economic benefits resulting from positions taken in income tax returns. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. ASC 740 requires that when determining the need for a valuation allowance against a deferred tax asset, management must assess both positive and negative evidence with regard to the realizability of the tax losses represented by that asset. To the extent available, if sources of taxable income are insufficient to absorb tax losses, a valuation allowance is necessary. Sources of taxable income for this analysis include prior years’ tax returns, the expected reversals of taxable temporary differences between book and tax income, prudent and feasible tax-planning strategies, and future taxable income. The deferred income tax asset related to the allowance for loan losses will be realized when actual charge-offs are made against the allowance. Based on the availability of loss carry-backs and projected taxable income during the periods for which loss carry-forwards are available, management believes it is more likely than not the Corporation will realize the deferred tax asset. The Corporation continues to monitor the deferred tax asset on a quarterly basis for a valuation allowance. The future realization of these tax benefits primarily hinges on adequate future earnings to utilize the tax benefit. Prospective earnings or losses, tax law 98 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 changes or capital changes could prompt the Corporation to reevaluate the assumptions which may be used to establish a valuation allowance. As of June 30, 2020 and 2019, the estimated deferred tax asset was $3.0 million and $3.5 million, respectively, and presented in prepaid expenses and other assets. The Corporation maintains net deferred tax assets for deductible temporary tax differences, such as loss reserves, deferred compensation, non-accrued interest and unrealized gains, among other items. The decrease in the net deferred tax asset resulted primarily from a decline in litigation reserves and an increase in deferred loan costs, partly offset by increases in loan loss reserves and deferred compensation. The Corporation did not have any liabilities for uncertain tax positions or any known unrecognized tax benefit at June 30, 2020 or 2019. Bank owned life insurance (“BOLI”) ASC 715-60-35, "Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements," requires an employer to recognize obligations associated with endorsement split-dollar life insurance arrangements that extend into the participant's post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. The Corporation adopted ASC 715-60-35 using the latter option, i.e., based on the future death benefit. The Bank purchases BOLI policies on the lives of certain executive officers while they are employed by the Bank and is the owner and beneficiary of the policies. The Bank invests in BOLI to provide an efficient form of funding for long-term retirement and other employee benefits costs. The Bank records these BOLI policies within prepaid expenses and other assets in the Consolidated Statements of Financial Condition at each policy’s respective cash surrender value, with net changes recorded in other non-interest income in the Consolidated Statements of Operations. Cash dividend A declaration or payment of dividends is at the discretion of the Corporation’s Board of Directors, who take into account the Corporation’s financial condition, results of operations, tax considerations, capital requirements, industry standards, economic conditions and other factors, including the regulatory restrictions which affect the payment of dividends by the Bank to the Corporation. Under Delaware law, dividends may be paid either out of surplus or, if there is no surplus, out of net profits for the current fiscal year and/or the preceding fiscal year in which the dividend is declared. For additional information, see Note 22 of the Notes to Consolidated Financial Statements regarding the subsequent event related to the cash dividend. Stock repurchases The Corporation repurchases its common stock consistent with Board-approved stock repurchase plans. During fiscal 2020, a total of 66,041 shares of common stock were purchased at an average cost of $19.43 per share. As of June 30, 2020, a total of 371,815 shares remain available for future repurchase pursuant to the Corporation’s April 2020 stock repurchase plan. Earnings per common share (“EPS”) Basic EPS represents net income divided by the weighted average common shares outstanding during the period excluding any potential dilutive effects. Diluted EPS gives effect to any potential issuance of common stock that would have caused basic EPS to be lower as if the issuance had already occurred. Accordingly, diluted EPS reflects an increase in the weighted average shares outstanding as a result of the assumed exercise of stock options and the vesting of restricted stock. The computation of diluted EPS does not assume exercise of stock options and vesting of restricted stock that would have an anti-dilutive effect on EPS. Stock-based compensation ASC 718, “Compensation – Stock Compensation,” requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and directors. Stock-based 99 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 compensation expense, inclusive of restricted stock expense, recognized in the consolidated statements of operations for the years ended June 30, 2020 and 2019 was $954,000 and $869,000, respectively. Employee Stock Ownership Plan ("ESOP") The Corporation recognizes compensation expense when the Bank contributes funds to the ESOP for the purchase of the Corporation’s common stock to be allocated to the ESOP participants. Since the contributions are discretionary, the benefits payable under the ESOP cannot be estimated. Restricted stock The Corporation recognizes compensation expense over the vesting period of the shares awarded, equal to the fair value of the shares at the award date. A total of $873,000 and $515,000 of restricted stock expense was amortized during fiscal 2020 and 2019, respectively. Post-retirement benefits The estimated obligation for post-retirement health care and life insurance benefits is determined based on an actuarial computation of the cost of current and future benefits for the eligible (grandfathered) retirees and employees. The post retirement benefit liability is included in accounts payable, accrued interest and other liabilities in the Consolidated Statements of Financial Condition. Effective July 1, 2003, the Corporation discontinued the post -retirement health care and life insurance benefits to any employee not previously qualified (grandfathered) for these benefits. At June 30, 2020 and 2019, the accrued liability for post-retirement benefits was $184,000 and $196,000, respectively, which was fully funded consistent with actuarially determined estimates of the future obligation. Comprehensive income ASC 220, “Comprehensive Income,” requires that realized revenue, expenses, gains and losses be included in net income (loss). Unrealized gains (losses) on available for sale securities and interest-only strips are reported as a separate component of the stockholders’ equity section of the Consolidated Statements of Financial Condition and the change in the unrealized gains (losses) are reported on the Consolidated Statements of Comprehensive Income and Consolidated Statements of Stockholders' Equity. Accounting standard updates (“ASU”) ASU 2016-02: In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, “Leases (Topic 842).” This ASU introduces a lessee model that brings most leases on the balance sheet and aligns many of the underlying principles of the new lessor model with those in the new revenue recognition standard, ASC 606, Revenue From Contracts With Customers. The new leases standard represents a wholesale change to lease accounting requiring the recognition of lease assets and lease liabilities in the balance sheet and disclosure of key information about leasing arrangements. The principal change required by ASU 2016-02 relates to lessee accounting, for operating leases, a lessee is required to (1) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position, (2) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term generally on a straight-line basis, and (3) classify all cash payments within operating activities in the statement of cash flows. For leases with an initial term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. ASU 2016-02 also changes disclosure requirements related to leasing activities and requires certain qualitative disclosures along with specific quantitative disclosures. This ASU was effective for annual periods 100 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 beginning after December 15, 2018 (i.e., calendar periods beginning on January 1, 2019), and interim periods therein, early adoption was permitted. In July 2018, the FASB issued ASU 2018-11, Leases, Targeted Improvements, which allowed entities the option of initially applying the new leases standard at the adoption date (such as January 1, 2019, for calendar year-end public business entities) and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In January 2019, the FASB issued ASU 2019-01, Codification Improvements. The amendments in this ASU included the following items: (i) determining the fair value of the underlying asset by lessors that are not manufacturers or dealers; (ii) requiring cash received from lessors from sales-type and direct financing leases to be presented in the cash flow statement within investing activities; and (iii) clarifying interim disclosure requirements. The effective date and transition requirements for the first and second items of ASU 2019-01 were effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. The effective date and transition requirements for the third item of ASU 2019-01 were the same as ASU 2016-02. The adoption of this ASU did not have a material impact on the Corporation’s Consolidated Financial Statements. See Note 5 of the Notes to Consolidated Financial Statements for additional discussion. ASU 2016-13: In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and subsequent amendments to the initial guidance in November 2018, ASU No. 2018-19, April 2019, ASU 2019-04, May 2019, ASU 2019-05, November 2019, ASU 2019-11, February 2020, ASU 2020-02 and March 2020, ASU 2020-03, all of which clarifies codification and corrects unintended application of the guidance. In November 2019, the FASB also issued ASU 2019-10, “Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates” extending the adoption date for certain registrants, including the Corporation. These ASUs will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Corporation is evaluating its current expected loss methodology of its loan and investment portfolios to identify the necessary modifications in accordance with these standards and expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. A valuation adjustment to its allowance for loan losses or investment portfolio that is identified in this process will be reflected as a one-time adjustment in equity rather than earnings upon adoption. The Corporation is in the process of compiling historical data that will be used to calculate expected credit losses on its loan portfolio to ensure the Corporation is fully compliant with these ASUs at the adoption date and is evaluating the potential impact adoption that these ASUs will have on the Corporation’s Consolidated Financial Statements. Once adopted, the Corporation anticipates the allowance for loan losses to increase through a one‑time adjustment to retained earnings, however, until the evaluation is complete the magnitude of the potential increase will be unknown. ASU 2018-13: In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which modifies disclosure requirements on fair value measurements to improve their effectiveness.” The guidance permits entities to consider materiality when evaluating fair value measurement disclosures and, among other modifications, requires certain new disclosures related to Level 3 fair value measurements. This guidance will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The guidance only affects disclosures in the notes to the consolidated financial statements and will not otherwise affect the Corporation’s Consolidated Financial Statements. ASU 2020-04: In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of reference Rate Reform on Financial Reporting. This ASU applies to contracts, hedging relationships and other transactions that reference 101 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 LIBOR or other rate references expected to be discontinued because of reference rate reform. The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract re-measurement or reassessment of a previous accounting determination. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Corporation is in the process of compiling data on the impact of reference rate reform and has not determined the impact of the adoption of this ASU on its consolidated financial statements. Note 2: Investment Securities The amortized cost and estimated fair value of investment securities as of June 30, 2020 and 2019 were as follows: June 30, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized (Losses) Estimated Fair Value Carrying Value (In Thousands) Held to maturity U.S. government sponsored enterprise MBS $ 115,763 $ 2,636 $ (45 ) $ 118,354 $ 115,763 U.S. SBA securities (1) 2,064 — (17 ) 2,047 2,064 Certificate of deposits 800 — — 800 800 Total investment securities - held to maturity $ 118,627 $ 2,636 $ (62 ) $ 121,201 $ 118,627 Available for sale U.S. government agency MBS $ 2,823 $ 120 $ — $ 2,943 $ 2,943 U.S. government sponsored enterprise MBS 1,556 21 — 1,577 1,577 Private issue CMO (2) 204 — (7 ) 197 197 Total investment securities - available for sale $ 4,583 $ 141 $ (7 ) $ 4,717 $ 4,717 Total investment securities $ 123,210 $ 2,777 $ (69 ) $ 125,918 $ 123,344 (1) Small Business Administration ("SBA"). (2) Collateralized Mortgage Obligations (“CMO”). 102 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 June 30, 2019 Amortized Cost Gross Unrealized Gains Gross Unrealized (Losses) Estimated Fair Value Carrying Value (In Thousands) Held to maturity U.S. government sponsored enterprise MBS $ 90,394 $ 1,289 $ (14 ) $ 91,669 $ 90,394 U.S. SBA securities 2,896 — (6 ) 2,890 2,896 Certificate of deposits 800 — — 800 800 Total investment securities - held to maturity $ 94,090 $ 1,289 $ (20 ) $ 95,359 $ 94,090 Available for sale U.S. government agency MBS $ 3,498 $ 116 $ (1 ) $ 3,613 $ 3,613 U.S. government sponsored enterprise MBS 1,998 89 — 2,087 2,087 Private issue CMO 261 8 — 269 269 Total investment securities - available for sale $ 5,757 $ 213 $ (1 ) $ 5,969 $ 5,969 Total investment securities $ 99,847 $ 1,502 $ (21 ) $ 101,328 $ 100,059 In fiscal 2020 and 2019, the Corporation received MBS principal payments of $32.1 million and $34.2 million, respectively and did not sell any investment securities. The Corporation purchased mortgage-backed securities totaling $55.9 million and $39.9 million during fiscal 2020 and 2019, respectively. As of June 30, 2020 and 2019, the Corporation held investments with an unrealized loss position of $69,000 and $21,000, respectively. As of June 30, 2020 Unrealized Holding Losses Unrealized Holding Losses Unrealized Holding Losses (In Thousands) Less Than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities Value Losses Value Losses Value Losses Held to maturity U.S. government sponsored enterprise MBS $ 12,731 $ 45 $ — $ — $ 12,731 $ 45 U.S. SBA securities — $ — 2,040 17 2,040 17 Total investment securities – held to maturity $ 12,731 $ 45 $ 2,040 $ 17 $ 14,771 $ 62 Available for sale Private issue CMO $ 197 $ 7 $ — $ — $ 197 $ 7 Total investment securities – available for sale $ 197 $ 7 $ — $ — $ 197 $ 7 Total investment securities $ 12,928 $ 52 $ 2,040 $ 17 $ 14,968 $ 69 103 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 As of June 30, 2019 Unrealized Holding Losses Unrealized Holding Losses Unrealized Holding Losses (In Thousands) Less Than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities Value Losses Value Losses Value Losses Held to maturity U.S. government sponsored enterprise MBS $ 6,507 $ 8 $ 1,657 $ 6 $ 8,164 $ 14 U.S. SBA securities — $ — 2,883 6 2,883 6 Total investment securities – held to maturity $ 6,507 $ 8 $ 4,540 $ 12 $ 11,047 $ 20 Available for sale U.S. government agency MBS $ 289 $ 1 $ — $ — $ 289 $ 1 Total investment securities – available for sale $ 289 $ 1 $ — $ — $ 289 $ 1 Total investment securities $ 6,796 $ 9 $ 4,540 $ 12 $ 11,336 $ 21 As of June 30, 2020, the Corporation had investment securities with unrealized holding losses of $52,000 that were less than 12 months and $17,000 that were in an unrealized loss position for more than 12 months, as compared to investment securities at June 30, 2019 with unrealized holding losses of $9,000 that were less than 12 months and $12,000 that were in an unrealized loss position for more than 12 months. The unrealized loss at June 30, 2020 was attributable to two U.S. government sponsored enterprise MBS, one U.S. SBA security and three private issue CMOs and, based on the nature of the investments, management concluded that such unrealized losses were not other than temporary. The unrealized loss at June 30, 2019 was attributable to one U.S. government agency MBS, three U.S. government sponsored enterprise MBS and one U.S. SBA security, and based on the nature of the investments, management concluded that such unrealized losses were not other than temporary. The Corporation does not believe that there was any OTTI at June 30, 2020 and 2019. At each of these dates, the Corporation intended and had the ability to hold the investment securities and was not likely to be required to sell the securities before realizing a full recovery. Contractual maturities of investment securities as of June 30, 2020 and 2019 were as follows: 104 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 June 30, 2020 June 30, 2019 (In Thousands) Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Held to maturity Due in one year or less $ 800 $ 800 $ 400 $ 400 Due after one through five years 19,389 20,194 32,584 32,728 Due after five through ten years 50,895 52,315 35,306 36,090 Due after ten years 47,543 47,892 25,800 26,141 Total investment securities - held to maturity $ 118,627 $ 121,201 $ 94,090 $ 95,359 Available for sale Due in one year or less $ — $ — $ — $ — Due after one through five years — — — — Due after five through ten years — — — — Due after ten years 4,583 4,717 5,757 5,969 Total investment securities - available for sale $ 4,583 $ 4,717 $ 5,757 $ 5,969 Total investment securities $ 123,210 $ 125,918 $ 99,847 $ 101,328 Note 3: Loans Held for Investment Loans held for investment consisted of the following at June 30, 2020 and 2019 : (In Thousands) June 30, 2020 June 30, 2019 Mortgage loans: Single-family $ 298,810 $ 324,952 Multi-family 491,903 439,041 Commercial real estate 105,235 111,928 Construction 7,801 4,638 Other 143 167 Commercial business loans 480 478 Consumer loans 94 134 Total loans held for investment, gross 904,466 881,338 Advance payments of escrows 68 53 Deferred loan costs, net 6,527 5,610 Allowance for loan losses (8,265 ) (7,076 ) Total loans held for investment, net $ 902,796 $ 879,925 105 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 The following table sets forth information at June 30, 2020 regarding the dollar amount of loans held for investment that are contractually repricing during the periods indicated, segregated between adjustable rate loans and fixed rate loans. Fixed-rate loans comprised 1% and 2% of loans held for investment at June 30, 2020 and June 30, 2019, respectively. Adjustable rate loans having no stated repricing date that reprice when the index they are tied to reprices (e.g. prime rate index) and checking account overdrafts are reported as repricing within one year. The table does not include any estimate of prepayments which may cause the Corporation’s actual repricing experience to differ materially from that shown. Adjustable Rate (In Thousands) Within One Year After One Year Through 3 Years After 3 Years Through 5 Years After 5 Years Through 10 Years Fixed Rate Total Mortgage loans: Single-family $ 80,167 $ 54,690 $ 89,820 $ 65,902 $ 8,231 $ 298,810 Multi-family 161,881 156,014 157,783 16,069 156 491,903 Commercial real estate 48,343 27,542 29,010 — 340 105,235 Construction 6,041 — — — 1,760 7,801 Other — — — — 143 143 Commercial business loans 85 — — — 395 480 Consumer loans 94 — — — — 94 Total loans held for investment, gross $ 296,611 $ 238,246 $ 276,613 $ 81,971 $ 11,025 $ 904,466 The Corporation has developed an internal loan grading system to evaluate and quantify the Bank’s loans held for investment portfolio with respect to quality and risk. Management continually evaluates the credit quality of the Corporation’s loan portfolio and conducts a quarterly review of the adequacy of the allowance for loan losses using quantitative and qualitative methods. The Corporation has adopted an internal risk rating policy in which each loan is rated for credit quality with a rating of pass, special mention, substandard, doubtful or loss. The two primary components that are used during the loan review process to determine the proper allowance levels are individually evaluated allowances and collectively evaluated allowances. Quantitative loan loss factors are developed by determining the historical loss experience, expected future cash flows, discount rates and collateral fair values, among others. Qualitative loan loss factors are developed by assessing general economic indicators such as Gross Domestic Product, Retail Sales, Unemployment Rates, Employment Growth, California Home Sales and Median California Home Prices, among others. The Corporation assigns individual factors for the quantitative and qualitative methods for each loan category and each internal risk rating. The Corporation categorizes all of the loans held for investment into risk categories based on relevant information about the ability of the borrower to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. A description of the general characteristics of the risk grades is as follows: ▪ Pass - These loans range from minimal credit risk to average however still acceptable credit risk. The likelihood of loss is considered remote. ▪ Special Mention - A special mention asset has potential weaknesses that may be temporary or, if left uncorrected, may result in a loss. While concerns exist, the Bank is currently protected and loss is considered unlikely and not imminent. ▪ Substandard - A substandard loan is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that 106 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 may jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. ▪ Doubtful - A doubtful loan has all of the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable. ▪ Loss - A loss loan is considered uncollectible and of such little value that continuance as an asset of the Bank is not warranted. The following tables summarize gross loans held for investment by loan types and risk category at the dates indicated: June 30, 2020 (In Thousands) Single- family Multi- family Commercial Real Estate Construction Other Mortgage Commercial Business Consumer Total Pass $ 289,942 $ 488,126 $ 105,235 $ 6,098 $ 143 $ 445 $ 94 $ 890,083 Special Mention 3,120 3,777 — 1,703 — — — 8,600 Substandard 5,748 — — — — 35 — 5,783 Total loans held for investment, gross $ 298,810 $ 491,903 $ 105,235 $ 7,801 $ 143 $ 480 $ 94 $ 904,466 June 30, 2019 (In Thousands) Single- family Multi- family Commercial Real Estate Construction Other Mortgage Commercial Business Consumer Total Pass $ 314,036 $ 435,177 $ 111,001 $ 3,667 $ 167 $ 429 $ 134 $ 864,611 Special Mention 3,795 3,864 927 — — — — 8,586 Substandard 7,121 — — 971 — 49 — 8,141 Total loans held for investment, gross $ 324,952 $ 439,041 $ 111,928 $ 4,638 $ 167 $ 478 $ 134 $ 881,338 The allowance for loan losses is maintained at a level sufficient to provide for estimated losses based on evaluating known and inherent risks in the loans held for investment and upon management’s continuing analysis of the factors underlying the quality of the loans held for investment. These factors include changes in the size and composition of the loans held for investment, actual loan loss experience, current economic conditions, detailed analysis of individual loans for which full collectability may not be assured, and determination of the realizable value of the collateral securing the loans. Provisions (recoveries) for loan losses are charged (credited) against operations on a quarterly basis, as necessary, to maintain the allowance at appropriate levels. Although management believes it uses the best information available to make such determinations, there can be no assurance that regulators, in reviewing the Corporation’s loans held for investment, will not request the Corporation to significantly increase its allowance for loan losses. Future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly and adversely affected as a result of economic, operating, regulatory, and other conditions beyond the Corporation’s control. Non-performing loans are charged-off to their fair market values in the period the loans, or portion thereof, are deemed uncollectible, generally after the loan becomes 150 days delinquent for real estate secured first trust deed loans and 120 days delinquent for commercial business or real estate secured second trust deed loans. For loans that were modified from their 107 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 original terms, were re-underwritten and identified in the Corporation's asset quality reports as restructured loans, the charge-off occurs when the loan becomes 90 days delinquent; and where borrowers file bankruptcy, the charge-off occurs when the loan becomes 60 days delinquent. The amount of the charge-off is determined by comparing the loan balance to the estimated fair value of the underlying collateral, less disposition costs, with the loan balance in excess of the estimated fair value charged-off against the allowance for loan losses. The allowance for loan losses for non-performing loans is determined by applying ASC 310, “Receivables.” For restructured loans that are less than 90 days delinquent, the allowance for loan losses are segregated into (a) individually evaluated allowances for those loans with applicable discounted cash flow calculations still in their restructuring period, classified lower than pass, and containing an embedded loss component or (b) collectively evaluated allowances based on the aggregated pooling method. For non-performing loans less than 60 days delinquent where the borrower has filed bankruptcy, the collectively evaluated allowances are assigned based on the aggregated pooling method. For non-performing commercial real estate loans, individually evaluated allowances are calculated based on their fair values and if their fair values are higher than their loan balances, no allowances are required. 108 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 The following tables summarize the Corporation’s allowance for loan losses and recorded investment in gross loans, by portfolio type, at the dates and for the periods indicated. Year Ended June 30, 2020 (In Thousands) Single- family Multi- family Commercial Real Estate Construction Other Mortgage Commercial Business Consumer Total Allowance at beginning of period $ 2,709 $ 3,219 $ 1,050 $ 61 $ 3 $ 26 $ 8 $ 7,076 Provision (recovery) for loan losses (156 ) 1,110 60 110 — (2 ) (3 ) 1,119 Recoveries 70 — — — — — 2 72 Charge-offs (1 ) — — — — — (1 ) (2 ) Allowance for loan losses, end of period $ 2,622 $ 4,329 $ 1,110 $ 171 $ 3 $ 24 $ 6 $ 8,265 Allowance: Individually evaluated for impairment $ 96 $ — $ — $ — $ — $ 4 $ — $ 100 Collectively evaluated for impairment 2,526 4,329 1,110 171 3 20 6 8,165 Allowance for loan losses, end of period $ 2,622 $ 4,329 $ 1,110 $ 171 $ 3 $ 24 $ 6 $ 8,265 Gross Loans: Individually evaluated for impairment $ 3,371 $ — $ — $ — $ — $ 35 $ — $ 3,406 Collectively evaluated for impairment 295,439 491,903 105,235 7,801 143 445 94 901,060 Total loans held for investment, gross $ 298,810 $ 491,903 $ 105,235 $ 7,801 $ 143 $ 480 $ 94 $ 904,466 Allowance for loan losses as a percentage of gross loans held for investment 0.88 % 0.88 % 1.05 % 2.19 % 2.10 % 5.00 % 6.38 % 0.91 % 109 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 Year Ended June 30, 2019 (In Thousands) Single- family Multi- family Commercial Real Estate Construction Other Mortgage Commercial Business Consumer Total Allowance at beginning of period $ 2,783 $ 3,492 $ 1,030 $ 47 $ 3 $ 24 $ 6 $ 7,385 Provision (recovery) for loan losses (241 ) (273 ) 20 14 — — 5 (475 ) Recoveries 198 — — — — 2 — 200 Charge-offs (31 ) — — — — — (3 ) (34 ) Allowance for loan losses, end of period $ 2,709 $ 3,219 $ 1,050 $ 61 $ 3 $ 26 $ 8 $ 7,076 Allowance: Individually evaluated for impairment $ 122 $ — $ — $ — $ — $ 8 $ — $ 130 Collectively evaluated for impairment 2,587 3,219 1,050 61 3 18 8 6,946 Allowance for loan losses, end of period $ 2,709 $ 3,219 $ 1,050 $ 61 $ 3 $ 26 $ 8 $ 7,076 Gross Loans: Individually evaluated for impairment $ 5,199 $ — $ — $ 971 $ — $ 49 $ — $ 6,219 Collectively evaluated for impairment 319,753 439,041 111,928 3,667 167 429 134 875,119 Total loans held for investment, gross $ 324,952 $ 439,041 $ 111,928 $ 4,638 $ 167 $ 478 $ 134 $ 881,338 Allowance for loan losses as a percentage of gross loans held for investment 0.83 % 0.73 % 0.94 % 1.32 % 1.80 % 5.44 % 5.97 % 0.80 % The following summarizes the components of the net change in the allowance for loan losses for the periods indicated: Year Ended June 30, (In Thousands) 2020 2019 Balance, beginning of year $ 7,076 $ 7,385 Provision (recovery) for loan losses 1,119 (475 ) Recoveries 72 200 Charge-offs (2 ) (34 ) Balance, end of year $ 8,265 $ 7,076 The following tables identify the Corporation’s total recorded investment in non-performing loans by type at the dates and for the periods indicated. Generally, a loan is placed on non-accrual status when it becomes 90 days past due as to principal or interest or if the loan is deemed impaired, after considering economic and business conditions and collection efforts, where the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. In addition, interest income is not recognized on any loan where management has determined that collection is not reasonably assured. A non-performing loan may be restored to accrual status when delinquent principal and interest payments are brought current and future monthly principal and interest payments are expected to be collected on a timely basis. Loans with a related allowance reserve have been individually evaluated for impairment using either a discounted cash flow analysis or, for collateral 110 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 dependent loans, current appraisals less costs to sell to establish realizable value. This evaluation may identify a specific impairment amount needed or may conclude that no reserve is needed. Loans that are not individually evaluated for impairment are included in pools of homogeneous loans for evaluation of related allowance reserves. At or For the Year Ended June 30, 2020 Unpaid Net Average Interest Principal Related Recorded Recorded Recorded Income (In Thousands) Balance Charge-offs Investment Allowance (1) Investment Investment Recognized Mortgage loans: Single-family: With a related allowance $ 3,289 $ — $ 3,289 $ (438 ) $ 2,851 $ 1,541 $ 60 Without a related allowance (2) 2,509 (467 ) 2,042 — 2,042 2,572 119 Total single-family loans 5,798 (467 ) 5,331 (438 ) 4,893 4,113 179 Construction: Without a related allowance (2) — — — — — 271 20 Total construction loans — — — — — 271 20 Commercial business loans: With a related allowance 35 — 35 (4 ) 31 42 4 Total commercial business loans 35 — 35 (4 ) 31 42 4 Total non-performing loans $ 5,833 $ (467 ) $ 5,366 $ (442 ) $ 4,924 $ 4,426 $ 203 (1) Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan. (2) There was no related allowance for loan losses because the loans have been charged-off to their fair value or the fair value of the collateral is higher than the loan balance. 111 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 At or For the Year Ended June 30, 2019 Unpaid Related Net Average Interest Principal Charge-offs Recorded Recorded Recorded Income (In Thousands) Balance Related Investment Allowance (1) Investment Investment Recognized Mortgage loans: Single-family: With a related allowance $ 2,640 $ — $ 2,640 $ (434 ) $ 2,206 $ 1,583 $ 110 Without a related allowance (2) 3,518 (518 ) 3,000 — 3,000 4,301 293 Total single-family loans 6,158 (518 ) 5,640 (434 ) 5,206 5,884 403 Construction: Without a related allowance (2) 971 — 971 — 971 664 — Total construction loans 971 — 971 — 971 664 — Commercial business loans: With a related allowance 49 — 49 (8 ) 41 58 5 Total commercial business loans 49 — 49 (8 ) 41 58 5 Total non-performing loans $ 7,178 $ (518 ) $ 6,660 $ (442 ) $ 6,218 $ 6,606 $ 408 (1) Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan. (2) There was no related allowance for loan losses because the loans have been charged-off to their fair value or the fair value of the collateral is higher than the loan balance. 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 Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (“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. 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. 112 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 As of June 30, 2020, loan forbearance related to COVID-19 hardship requests are described below: Forbearance Granted Forbearance Completed Forbearance Remaining (Dollars In Thousands) Number of Loans Amount Number of Loans Amount Number of Loans Amount Single-family loans 52 $ 21,470 4 $ 1,579 48 $ 19,891 Multi-family loans 3 1,592 — — 3 1,592 Commercial real estate loans 2 1,071 — — 2 1,071 Total loan forbearance 57 $ 24,133 4 $ 1,579 53 $ 22,554 As of June 30, 2020, loan forbearance outstanding balances are described below: (Dollars In Thousands) Number of Loans Amount % of Total Loans Weighted Avg. LTV (1) Weighted Avg. FICO (2) Weighted Avg. Debt Coverage Ratio (3) Weighted Avg. Forbearance Period Granted (4) Single-family loans 48 $ 19,891 2.20 % 64 % 727 N/A 6.0 Multi-family loans 3 1,592 0.17 % 41 % 719 1.65 x 3.3 Commercial real estate loans (5) 2 1,071 0.12 % 31 % 755 1.36 x 3.5 Total loans in forbearance 53 $ 22,554 2.49 % 61 % 727 1.53 x 5.7 (1) Current loan balance in comparison to the original appraised value. (2) At time of loan origination, borrowers and/or guarantors. (3) At time of loan origination. (4) In months. (5) Comprised of $579 thousand in Office and $493 thousand in Mixed Used – Office/Single-Family Residential. In addition, as of June 30, 2020, the Bank had pending requests for payment relief for an additional seven single-family loans totaling approximately $2.6 million. 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. 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. At June 30, 2020 and 2019, there were no commitments to lend additional funds to those borrowers whose loans were classified as non-performing, except for one construction loan with undisbursed loan funds of $1.0 million at June 30, 2019. During the fiscal years ended June 30, 2020 and 2019, the Corporation’s average investment in non-performing loans was $4.4 million and $6.6 million, respectively. The Corporation records payments on non-performing loans utilizing the cash basis or cost recovery method of accounting during the periods when the loans are on non-performing status. For the fiscal year ended June 30, 2020, the Bank received $312,000 in interest payments from non-performing loans, of which $203,000 was recognized as interest income. The remaining $109,000 was applied to reduce the loan balances under the cost recovery method. In comparison, for the fiscal year ended June 30, 2019, the Bank received $574,000 in interest payments from non-performing 113 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 loans, of which $408,000 was recognized as interest income. The remaining $166,000 was applied to reduce the loan balances under the cost recovery method. The following tables denote the past due status of the Corporation's loans held for investment, gross, at the dates indicated. June 30, 2020 (In Thousands) Current 30-89 Days Past Due Non-Accrual (1) Total Loans Held for Investment, Gross Mortgage loans: Single-family $ 293,326 $ 219 $ 5,265 $ 298,810 Multi-family 491,903 — — 491,903 Commercial real estate 105,235 — — 105,235 Construction 7,801 — — 7,801 Other 143 — — 143 Commercial business loans 445 — 35 480 Consumer loans 94 — — 94 Total loans held for investment, gross $ 898,947 $ 219 $ 5,300 $ 904,466 (1) All loans 90 days or greater past due are placed on non-accrual status. June 30, 2019 (In Thousands) Current 30-89 Days Past Due Non-Accrual (1) Total Loans Held for Investment, Gross Mortgage loans: Single-family $ 318,671 $ 660 $ 5,621 $ 324,952 Multi-family 439,041 — — 439,041 Commercial real estate 111,928 — — 111,928 Construction 3,667 — 971 4,638 Other 167 — — 167 Commercial business loans 429 — 49 478 Consumer loans 129 5 — 134 Total loans held for investment, gross $ 874,032 $ 665 $ 6,641 $ 881,338 (1) All loans 90 days or greater past due are placed on non-accrual status. For the fiscal year ended June 30, 2020, there were two loans that were newly modified from their original terms, re-underwritten or identified as a restructured loan; one loan (previously modified) was downgraded; one loan was upgraded to the pass category; two loans were paid off; and no loans were converted to real estate owned. For the fiscal year ended June 30, 2019, there were no loans that were newly modified from their original terms, re-underwritten or identified as a restructured loan; one loan (previously modified) was downgraded; three loans were upgraded to the pass category; one loan was paid off; and no loans were converted to real estate owned. During the fiscal years ended June 30, 2020 and 2019, no restructured loans 114 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 were in default within a 12-month period subsequent to their original restructuring. Additionally, during the fiscal year ended June 30, 2020, there were no restructured loans that were extended beyond the initial maturity of the modification; while in fiscal 2019, there was one restructured loan of $56,000 that was extended beyond the initial maturity of the modification. As of June 30, 2020, the net outstanding balance of the Corporation’s eight restructured loans was $2.6 million, all were classified as substandard on non-accrual status. As of June 30, 2020, $1.2 million, or 44 percent, of the restructured loans were current with respect to their payment status, consistent with modified terms. As of June 30, 2019, the net outstanding balance of the Corporation’s eight restructured loans was $3.8 million: one was classified as special mention on accrual status ($437,000); one was classified as substandard on accrual status ($1.4 million); and six were classified as substandard on non-accrual status ($1.9 million). As of June 30, 2019, $1.2 million, or 44 percent, of the restructured loans were current with respect to their payment status, consistent with modified terms. At both June 30, 2020 and June 30, 2019, there were no commitments to lend additional funds to those borrowers whose loans were restructured. The following table summarizes at the dates indicated the restructured loan balances, net of allowance for loan losses or charge-offs, by loan type and non-accrual versus accrual status at June 30, 2020 and 2019 : At June 30, (In Thousands) 2020 2019 Restructured loans on non-accrual status: Mortgage loans: Single-family $ 2,612 $ 1,891 Commercial business loans 31 41 Total 2,643 1,932 Restructured loans on accrual status: Mortgage loans: Single-family — 1,861 Total — 1,861 Total restructured loans $ 2,643 $ 3,793 115 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 The following tables show the restructured loans by type, net of allowance for loan losses or charge-offs, at June 30, 2020 and 2019: At June 30, 2020 Unpaid Net Principal Related Recorded Recorded (In Thousands) Balance Charge-offs Investment Allowance (1) Investment Mortgage loans: Single-family: With a related allowance $ 1,650 $ — $ 1,650 $ (108 ) $ 1,542 Without a related allowance (2) 1,435 (365 ) 1,070 — 1,070 Total single-family 3,085 (365 ) 2,720 (108 ) 2,612 Commercial business loans: With a related allowance 35 — 35 (4 ) 31 Total commercial business loans 35 — 35 (4 ) 31 Total restructured loans $ 3,120 $ (365 ) $ 2,755 $ (112 ) $ 2,643 (1) Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan. (2) There was no related allowance for loan losses because the loans have been charged-off to their fair value or the fair value of the collateral is higher than the loan balance. At June 30, 2019 Unpaid Net Principal Related Recorded Recorded (In Thousands) Balance Charge-offs Investment Allowance (1) Investment Mortgage loans: Single-family: With a related allowance $ 2,199 $ — $ 2,199 $ (122 ) $ 2,077 Without a related allowance (2) 2,040 (365 ) 1,675 — 1,675 Total single-family 4,239 (365 ) 3,874 (122 ) 3,752 Commercial business loans: With a related allowance 49 — 49 (8 ) 41 Total commercial business loans 49 — 49 (8 ) 41 Total restructured loans $ 4,288 $ (365 ) $ 3,923 $ (130 ) $ 3,793 (1) Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan. (2) There was no related allowance for loan losses because the loans have been charged-off to their fair value or the fair value of the collateral is higher than the loan balance. 116 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 In the ordinary course of business, the Bank makes loans to its directors, officers and employees on substantially the same terms prevailing at the time of origination for comparable transactions with unaffiliated borrowers. The following is a summary of related-party loan activity: Year Ended June 30, (In Thousands) 2020 2019 Balance, beginning of year $ 2 $ 677 Originations — — Sales and payments (1 ) (675 ) Balance, end of year $ 1 $ 2 As of June 30, 2020 and 2019, all of the related-party loans were performing in accordance with their original contractual terms. Note 4: Mortgage Loan Servicing and Loans Originated for Sale The following summarizes the unpaid principal balance of loans serviced for others by the Corporation at the dates indicated: At June 30, (In Thousands) 2020 2019 Loans serviced for Freddie Mac $ 14,210 $ 18,613 Loans serviced for Fannie Mae 64,910 89,910 Loans serviced for FHLB – San Francisco 7,385 9,724 Loans serviced for other investors — 1,989 Total loans serviced for others $ 86,505 $ 120,236 MSA are recorded when loans are sold to investors and the servicing of those loans is retained by the Bank. MSA are subject to interest rate risk and may become impaired when interest rates fall and the borrowers refinance or prepay their mortgage loans. The MSA are derived primarily from single-family loans. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and processing foreclosures. Income from servicing loans is reported as loan servicing and other fees in the Corporation’s Consolidated Statements of Operations, and the amortization of MSA is reported as a reduction to the loan servicing income. Loan servicing income includes servicing fees from investors and certain fees collected from borrowers, such as late payment fees. As of June 30, 2020 and 2019, the Corporation held borrowers’ escrow balances related to loans serviced for others of $377,000 and $539,000, respectively. In estimating fair values of the MSA at June 30, 2020 and 2019, the Corporation used a weighted-average constant prepayment rate (“CPR”) of 26.07% and 23.86%, respectively, and a weighted-average discount rate of 9.11% at both dates. Management obtained CPR estimates from an independent third party and reviewed for reasonableness given current market data. The discount rates were derived from market data. The MSA, which is included in prepaid expenses and other assets in the Consolidated Statements of Financial Condition, had a carrying value of $673,000 and a fair value of $382,000 at June 30, 2020. This compares to the MSA at June 30, 2019 which had a carrying value of $925,000 and a fair value of $627,000. An allowance may be recorded to adjust the carrying value of the MSA to the lower of cost or fair value. As of June 30, 2020, a 117 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 total allowance of $291,000 was required for MSA, compared to a total allowance of $298,000 for MSA as of June 30, 2019. Total additions to the MSA during the years ended June 30, 2020 and 2019 were $0 and $52,000, respectively. Total amortization of the MSA during the years ended June 30, 2020 and 2019 was $252,000 and $125,000, respectively. Loans sold to the FHLB – San Francisco were completed under the MPF Program, which entitles the Bank to a credit enhancement fee collected from FHLB – San Francisco on a monthly basis and is described in Note 1 under Loans originated and held for sale. The following table summarizes the Corporation’s MSA for years ended June 30, 2020 and 2019: Year Ended June 30, (Dollars In Thousands) 2020 2019 MSA balance, beginning of fiscal year $ 925 $ 998 Additions — 52 Amortization (252 ) (125 ) MSA balance, end of fiscal year, before allowance 673 925 Allowance (291 ) (298 ) MSA balance, end of fiscal year $ 382 $ 627 Fair value, beginning of fiscal year $ 627 $ 1,015 Fair value, end of fiscal year $ 382 $ 627 Allowance, beginning of fiscal year $ 298 $ 82 Impairment (recovery) provision (7 ) 216 Allowance, end of fiscal year $ 291 $ 298 Key Assumptions: Weighted-average discount rate 9.11 % 9.11 % Weighted-average prepayment speed 26.07 % 23.86 % 118 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 The following table summarizes the estimated future amortization of MSA for the next five years and thereafter: Amount Year Ending June 30, (In Thousands) 2021 $ 129 2022 103 2023 74 2024 51 2025 35 Thereafter 281 Total estimated amortization expense $ 673 The following table represents the hypothetical effect on the fair value of the Corporation’s MSA using an unfavorable shock analysis of certain key valuation assumptions as of June 30, 2020 and 2019. This analysis is presented for hypothetical purposes only. As the amounts indicate, changes in fair value based on changes in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear. Year Ended June 30, (Dollars In Thousands) 2020 2019 MSA net carrying value $ 382 $ 627 CPR assumption (weighted-average) 26.07 % 23.86 % Impact on fair value with 10% adverse change in prepayment speed $ (19 ) $ (30 ) Impact on fair value with 20% adverse change in prepayment speed $ (35 ) $ (58 ) Discount rate assumption (weighted-average) 9.11 % 9.11 % Impact on fair value with 10% adverse change in discount rate $ (12 ) $ (20 ) Impact on fair value with 20% adverse change in discount rate $ (23 ) $ (40 ) Loans sold consisted of the following for the years indicated: Year Ended June 30, (In Thousands) 2020 2019 Loans sold: Servicing – released $ — $ 551,754 Servicing – retained — 7,196 Total loans sold $ — $ 558,950 Consistent with the Corporation’s announcement on February 4, 2019 to scale back operations related to the origination of saleable single-family mortgage loans and improve on its efforts to increase the volume of portfolio single-family mortgage loan originations, there were no loans sold in fiscal 2020, as compared to $559.0 million in fiscal 2019; and there were no outstanding loans held for sale at June 30, 2020 and June 30, 2019. 119 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 Note 5: Leases The Corporation accounts for its leases in accordance with ASC 842, which was implemented on July 1, 2019, and requires the Corporation to record liabilities for future lease obligations as well as assets representing the right to use the underlying leased assets. The Corporation’s leases primarily represent future obligations to make payments for the use of buildings, space or equipment for its operations. Liabilities to make future lease payments are recorded in accounts payable, accrued interest and other liabilities, while right-of-use assets are recorded in premises and equipment in the Corporation’s consolidated statements of financial condition. At June 30, 2020, all of the Corporation’s leases were classified as operating leases and the Corporation did not have any operating leases with an initial term of 12 months or less (“short-term leases”). Liabilities to make future lease payments and right of use assets are recorded for operating leases and do not include short-term leases. These liabilities and right-of-use assets are determined based on the total contractual base rents for each lease, which include options to extend or renew each lease, where applicable, and where the Corporation believes it has an economic incentive to extend or renew the lease. Due to the fact that lease extensions are not reasonably certain, the Corporation generally does not recognize payments occurring during option periods in the calculation of its operating right-of-use lease assets and operating lease liabilities. The Corporation utilizes the FHLB - San Francisco rates as a discount rate for each of the remaining contractual terms at the adoption date as well as for future leases if the discount rate is not stated in the lease. For leases that contain variable lease payments, the Corporation assumes future lease payment escalations based on a lease payment escalation rate specified in the lease or the specified index rate observed at the time of lease commencement. Liabilities to make future lease payments are accounted for using the interest method, being reduced by periodic contractual lease payments net of periodic interest accretion. Right-of-use assets for operating leases are amortized over the term of the associated lease by amounts that represent the difference between periodic straight-line lease expense and periodic interest accretion in the related liability to make future lease payments. For the fiscal year ended June 30, 2020, expenses associated with the Corporation’s leases totaled $825,000, and was recorded in premises and occupancy expenses and equipment expenses in the consolidated statements of operations. 120 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 The following table presents supplemental information related to operating leases at the date and for the periods indicated: (In Thousands) Year Ended June 30, 2020 As of June 30, 2020 Consolidated Statements of Condition: Premises and equipment - Operating lease right of use assets $ 2,525 Accounts payable, accrued interest and other liabilities – Operating lease liabilities $ 2,640 Consolidated Statements of Operations: Premises and occupancy expenses from operating leases (1) (2) $ 768 Equipment expenses from operating leases $ 57 Consolidated Statements of Cash Flows: Operating cash flows from operating leases, net (2) $ 1,035 (1) Variable lease costs are immaterial. (2) Revenue related to sublease activity is immaterial and netted against operating lease expenses. The following table provides information related to remaining minimum contractual lease payments and other information associated with the Corporation’s leases as of June 30, 2020: Amount (1) Year Ending June 30, (In Thousands) 2021 $ 750 2022 671 2023 469 2024 359 2025 255 Thereafter 275 Total contract lease payments $ 2,779 Total liability to make lease payments $ 2,640 Difference in undiscounted and discounted future lease payments $ 139 Weighted average discount rate 2.16 % Weighted average remaining lease term (years) 4.6 (1) Contractual base rents do not include property taxes and other operating expenses due under respective lease agreements. 121 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 The following table summarizes the impact of the adoption of the new lease accounting guidance on the Corporation’s consolidated statements of financial condition as of July 1, 2019: (In Thousands) June 30, 2019 Adjustments due to new lease guidance July 1, 2019 June 30, 2020 Total assets $ 1,084,850 $ 3,399 $ 1,088,249 $ 1,176,837 Total liabilities $ 964,209 $ 3,704 $ 967,913 $ 1,052,861 Total equity $ 120,641 $ — $ 120,641 $ 123,976 Note 6: Premises and Equipment Premises and equipment at June 30, 2020 and 2019 consisted of the following: (In Thousands) June 30, 2020 2019 Land $ 2,853 $ 2,853 Buildings 9,734 9,759 Leasehold improvements 3,243 3,252 Furniture and equipment 5,290 5,438 Automobiles 167 170 Operating lease – right of use assets (1) 2,525 — 23,812 21,472 Less accumulated depreciation and amortization (13,558 ) (13,246 ) Total premises and equipment, net $ 10,254 $ 8,226 (1) Net of accumulated amortization. Depreciation and amortization expense for the years ended June 30, 2020 and 2019 amounted to $1.5 million and $881,000, respectively. 122 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 Note 7: Deposits Deposits at June 30, 2020 and 2019 consisted of the following: (Dollars in Thousands) June 30, 2020 June 30, 2019 Interest Rate Amount Interest Rate Amount Checking deposits – non interest-bearing — $ 118,771 — $ 90,184 Checking deposits – interest-bearing (1) 0% - 0.25% 290,463 0% - 0.30% 257,909 Savings deposits (1) 0% - 1.00% 273,769 0% - 1.29% 264,387 Money market deposits (1) 0% - 2.00% 39,989 0% - 2.00% 35,646 Time deposits: (1) Under $100 0.00% - 2.13% 82,180 0.00% - 2.13% 94,200 $100 and over 0.15% - 2.13% 87,797 0.15% - 2.52% 98,945 Total deposits $ 892,969 $ 841,271 Weighted-average interest rate on deposits 0.26 % 0.37 % (1) Certain interest-bearing checking, savings, money market and time deposits require a minimum balance to earn interest. The aggregate annual maturities of time deposits at June 30, 2020 and 2019 were as follows: (In Thousands) June 30, 2020 2019 One year or less $ 90,576 $ 106,080 Over one to two years 33,995 37,117 Over two to three years 25,937 26,334 Over three to four years 8,184 15,135 Over four to five years 10,350 7,784 Over five years 935 695 Total time deposits $ 169,977 $ 193,145 Interest expense on deposits for the periods indicated is summarized as follows: Year Ended June 30, (In Thousands) 2020 2019 Checking deposits – interest-bearing $ 314 $ 305 Savings deposits 496 572 Money market deposits 110 123 Time deposits 2,023 2,381 Total interest expense on deposits $ 2,943 $ 3,381 The Bank is required to maintain reserve balances with the Federal Reserve Bank of San Francisco. Such reserves are calculated based on deposit balances and are offset by the cash balances maintained by the Bank. The cash balances maintained by the Bank at June 30, 2020 and 2019 were sufficient to cover the reserve requirements. 123 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 Note 8: Borrowings Advances from the FHLB – San Francisco, which mature on various dates through 2025, are collateralized by pledges of certain real estate loans with an aggregate balance at June 30, 2020 and 2019 of $658.7 million and $643.0 million, respectively. In addition, the Bank pledged investment securities totaling $2.2 million and $3.2 million to collateralize its FHLB – San Francisco advances under the Securities-Backed Credit (“SBC”) program at June 30, 2020 and 2019, respectively. At June 30, 2020, the Bank’s FHLB – San Francisco borrowing capacity, which is limited to 35% of total assets reported on the Bank’s quarterly Call Report, was approximately $387.6 million and $391.8 million at June 30, 2020 and 2019, respectively. As of June 30, 2020 and 2019, the remaining/available borrowing facility was $228.1 million and $275.2 million, respectively, and the remaining/available collateral was $351.5 million and $434.7 million, respectively. In addition, as of June 30, 2020 and 2019, the Bank had a $94.4 million and $74.2 million discount window facility, respectively, at the Federal Reserve Bank of San Francisco, collateralized by investment securities with a fair market value of $100.4 million and $79.0 million, respectively. As of June 30, 2020 and 2019, the Bank also had a borrowing arrangement in the form of a federal funds facility with its correspondent bank for $17.0 million at both dates. The Bank intends to request a renewal of its borrowing arrangement with the correspondent bank prior to maturity. As of both June 30, 2020 and 2019, there were no outstanding borrowings under the discount window facility or the federal funds facility with the correspondent bank. Borrowings at June 30, 2020 and 2019 consisted of the following: (In Thousands) June 30, 2020 2019 FHLB – San Francisco advances $ 141,047 $ 101,107 Borrowings, consisting of FHLB – San Francisco advances, at June 30, 2020 and 2019 were $141.1 million and $101.1 million, respectively. In addition to the total borrowings described above, the Bank utilizes its borrowing facility for letters of credit and MPF credit enhancement. The outstanding letters of credit at June 30, 2020 and 2019 were $16.0 million and $13.0 million, respectively; and the outstanding MPF credit enhancement was $2.5 million at both, June 30, 2020 and June 30, 2019. As a member of the FHLB – San Francisco, the Bank is required to maintain a minimum investment in FHLB – San Francisco capital stock. The Bank held a stock investment of $8.0 million with excess capital stock of $1.1 million at June 30, 2020. This compares to a required stock investment of $8.2 million with excess capital stock of $470,000 at June 30, 2019. During fiscal 2020, the FHLB – San Francisco redeemed $229,000 of the excess capital stock, while the Bank did not purchase any FHLB - San Francisco capital stock. During fiscal 2019, the FHLB – San Francisco did not redeem any capital stock and the Bank did not purchase any FHLB - San Francisco capital stock. In fiscal 2020 and 2019, the FHLB – San Francisco distributed $534,000 and $707,000 of cash dividends, respectively, to the Bank. The cash dividends received by the Bank in fiscal 2019 included a special cash dividend of $133,000. 124 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 The following tables set forth certain information regarding borrowings by the Bank at the dates and for the years indicated: At or For the Year Ended June 30, (Dollars in Thousands) 2020 2019 Balance outstanding at the end of year: FHLB – San Francisco advances $ 141,047 $ 101,107 Weighted-average rate at the end of year: FHLB – San Francisco advances 2.23 % 2.62 % Maximum amount of borrowings outstanding at any month end: FHLB – San Francisco advances $ 141,057 $ 136,158 Average short-term borrowings during the year with respect to: (1) FHLB – San Francisco advances $ 11,562 $ 8,425 Weighted-average short-term borrowing rate during the year with respect to: (1) FHLB – San Francisco advances 3.30 % 1.69 % (1) Borrowings with a remaining term of 12 months or less. The aggregate annual contractual maturities of borrowings at June 30, 2020 and 2019 were as follows: (Dollars in Thousands) June 30, 2020 2019 Within one year $ 30,000 $ — Over one to two years 31,047 20,000 Over two to three years 30,000 21,107 Over three to four years 30,000 10,000 Over four to five years 20,000 30,000 Over five years — 20,000 Total borrowings $ 141,047 $ 101,107 Weighted average interest rate 2.23 % 2.62 % 125 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 Note 9: Income Taxes ASC 740, “Income Taxes,” requires the affirmative evaluation that it is more likely than not, based on the technical merits of a tax position, that an enterprise is entitled to economic benefits resulting from positions taken in income tax returns. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. Management has determined that there were no unrecognized tax benefits to be reported in the Corporation’s consolidated financial statements for the years ended June 30, 2020 and 2019. Under generally accepted accounting principles, the Corporation uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled On March 18, 2020, President Trump signed into law H.R.6201/P.L. 116-27, “An Act making emergency supplemental appropriations”, the legislation more commonly known as the Families First Coronavirus Response Act (the “Families First Act”). Additionally, on March 27, 2020, President Trump signed into law H.R. 748/Public Law No. 116-36, “An Act to provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic, the “CARES Act. Pursuant to ASC 740-10-25-47, the effects of the new federal legislation are recognized upon enactment, which is the date the president signs a bill into law. The Corporation believes it has applied the provisions of the Families First Act and CARES act in accordance with ASC 740. The Corporation’s effective tax rate may differ from the estimated statutory tax rates described above due to discrete items such as further adjustments to net deferred tax assets, excess tax benefits derived from stock option exercises and non-taxable earnings from bank owned life insurance, among other items. The Corporation utilizes the asset and liability method of accounting for income taxes whereby deferred tax assets are recognized for deductible temporary differences and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment. The provision for income taxes for the periods indicated consisted of the following: Year Ended June 30, (In Thousands) 2020 2019 Current: Federal $ 1,742 $ 445 State 919 408 2,661 853 Deferred: Federal 291 478 State 261 172 552 650 Provision for income taxes $ 3,213 $ 1,503 126 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 The Corporation's tax benefit from non-qualified equity compensation recognized in the Consolidated Statements of Operations in connection with the adoption of ASU 2016-09 for fiscal 2020 and 2019 was $8,000 and $147,000, respectively. The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to net income before income taxes as a result of the following differences for the periods indicated: Year Ended June 30, 2020 2019 (In Thousands) Amount Tax Rate Amount Tax Rate Federal income tax at statutory rate $ 2,289 21.00 % $ 1,243 21.00 % State income tax, net of federal income tax benefit 930 8.53 % 456 7.70 % Changes in taxes resulting from: Bank-owned life insurance (40 ) (0.36 )% (39 ) (0.66 )% Non-deductible expenses 41 0.37 % 21 0.35 % Non-deductible stock-based compensation (10 ) (0.09 )% (2 ) (0.03 )% Excess tax benefit on stock-based compensation (7 ) (0.07 )% (104 ) (1.77 )% Return to provision adjustment 7 0.06 % (77 ) (1.29 )% Other 3 0.02 % 5 0.08 % Effective income tax $ 3,213 29.46 % $ 1,503 25.38 % Deferred tax assets at June 30, 2020 and 2019 by jurisdiction were as follows: June 30, (In Thousands) 2020 2019 Deferred taxes – federal $ 1,908 $ 2,178 Deferred taxes – state 1,103 1,361 Total net deferred tax assets $ 3,011 $ 3,539 127 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 Net deferred tax assets at June 30, 2020 and 2019 were comprised of the following: (In Thousands) June 30, 2020 2019 Loss reserves $ 3,034 $ 2,685 Non-accrued interest 326 483 Deferred compensation 2,824 2,396 Accrued vacation 177 124 Depreciation 90 95 Litigation reserves — 876 Other 395 588 Total deferred tax assets 6,846 7,247 FHLB - San Francisco stock dividends (645 ) (664 ) Prepaid expenses (41 ) (56 ) Unrealized gain on investment securities (40 ) (63 ) Unrealized gain on interest-only strips (4 ) (5 ) Deferred loan costs (3,071 ) (2,723 ) State tax (34 ) (197 ) Total deferred tax liabilities (3,835 ) (3,708 ) Net deferred tax assets $ 3,011 $ 3,539 The net deferred tax assets were included in prepaid expenses and other assets in the Consolidated Statements of Financial Condition. The Corporation analyzes the deferred tax assets to determine whether a valuation allowance is required based on the more likely than not criteria that such assets will be realized principally through future taxable income. This criteria takes into account the actual earnings and the estimates of future profitability. The Corporation may carryback net federal tax losses to the preceding five taxable years and forward to the succeeding 20 taxable years. At June 30, 2020 and 2019, the Corporation had no federal and state net tax loss carryforwards. Based on management's consideration of historical and anticipated future income before income taxes, as well as the reversal period for the items giving rise to the deferred tax assets and liabilities, a valuation allowance was not considered necessary at June 30, 2020 and 2019 and management believes it is more likely than not the Corporation will realize its deferred tax asset. Retained earnings at June 30, 2020 and 2019 include approximately $9.0 million (pre-1988 bad debt reserve for tax purposes) for which federal income tax of $3.1 million has not been provided. If the amounts that qualify as deductions for federal income tax purposes are later used for purposes other than for bad debt losses, including distribution in liquidation, they will be subject to federal income tax at the then-current corporate tax rate. If those amounts are not so used, they will not be subject to tax even in the event the Bank were to convert its charter from a thrift to a bank. The Corporation files income tax returns for the United States and California jurisdictions. The Internal Revenue Service has audited the Bank’s income tax returns through 1996 and the California Franchise Tax Board has audited the Bank through 1990. Also, the Internal Revenue Service completed a review of the Corporation’s income tax returns for fiscal 2006 and 2007; and the California Franchise Tax Board completed a review of the Corporation’s income tax returns for fiscal 2009 and 2010. Fiscal years of 2016 and thereafter remain subject to federal examination, while the California state tax returns for fiscal years 2015 and thereafter are subject to examination by state taxing authorities. 128 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 It is the Corporation’s policy to record any penalties or interest charges arising from federal or state taxes as a component of income tax expense. For the fiscal year ended June 30, 2020 and 2019, there were no tax penalties and no interest charges arising from federal or state taxes. Note 10: Capital The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements. Under 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 weightings and other factors. Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), the Bank and the Corporation became subject to new capital adequacy requirements which were fully phased-in on January 1, 2019. Since the Corporation has 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. The capital adequacy requirements are quantitative measures established by regulation that require the Bank to maintain minimum amounts and ratios of capital. The changes in capital requirements required a minimum ratio for common equity Tier 1 (“CET1”) capital, increased the Tier1 leverage and Tier 1 capital ratios, changed the risk-weightings of certain assets for purposes of the risk-based capital ratios, created an additional capital conservation buffer over the required capital ratios and changed what qualifies as capital for purposes of meeting these various capital requirements. Failure to meet minimum requirements can initiate certain mandatory and possibly additional discretionary actions by bank regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements. The Bank is required to maintain additional levels of Tier 1 common equity over the minimum risk-based capital levels before payment of dividends, repurchase of shares or payment of discretionary bonuses. 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 June 30, 2020, the capital conservation buffer required a minimum of 2.50% of risk weighted assets. For calendar 2019 and thereafter, the minimum requirements call for a Tier1 leverage ratio of 4.00%, a ratio of common equity Tier 1 capital ("CET1") to total risk-weighted assets (“CET1 risk-based ratio”) of 7.00%, a Tier 1 capital ratio of 8.50%, and a total capital ratio of 10.50%. Under the standards, in order to be considered well-capitalized, the Bank must have at minimum a Tier1 leverage ratio of 5%, a CET1 capital ratio of 6.50%, a Tier 1 capital ratio of 8.00%, and a total capital ratio of 10.00%. 129 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 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 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 % 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) Inclusive of the conservation buffer of 2.50% for CET1 capital, Tier 1 capital and Total capital ratios. At June 30, 2020, the Bank exceeded all regulatory capital requirements. The Bank was categorized as "well-capitalized" at June 30, 2020 under the regulations of the OCC. 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 cash dividends on or repurchase any of its shares of common stock, if the effect would cause stockholders’ equity to be reduced below applicable regulatory capital maintenance requirements or if such declaration and payment would otherwise violate regulatory requirements. Generally, savings institutions, such as the Bank, that before and after the proposed distribution are well-capitalized, may make capital distributions during any calendar year up to 100% of net income for the year-to-date plus retained net income for the two preceding years. However, an institution deemed to be in need of more than normal supervision or in troubled condition by the OCC may have its dividend authority restricted by the OCC. If the Bank, however, proposes to make a capital distribution when it does not meet its capital requirements (or will not following the proposed capital distribution) or that will exceed these net income-based limitations, it must obtain the OCC's approval prior to making such distribution. In addition, the Bank must file a prior written notice of a dividend with the Federal Reserve Board (“FRB”). The FRB or the OCC may object to a capital distribution based on safety and soundness concerns. Additional restrictions on Bank dividends may apply if the Bank fails the Qualified Thrift Lender test. In fiscal 2020 and 2019, the Bank declared $7.5 million of cash dividends to its parent, the Corporation, at both dates. 130 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 Note 11: Benefit Plans The Corporation has a 401(k) defined-contribution plan covering all employees meeting specific age and service requirements. Under the plan, employees may contribute to the plan from their pretax compensation up to the limits set by the Internal Revenue Service. The Corporation makes matching contributions up to 3% of a participants’ pretax compensation. Participants vest immediately in their own contributions with 100% vesting in the Corporation’s contributions occurring after six years of credited service. The Corporation’s expense for the plan was approximately $327,000 and $568,000 for the years ended June 30, 2020 and 2019, respectively. The Corporation has a multi-year employment agreement and a post-retirement compensation agreement with one executive officer and a post-retirement compensation agreement with another executive officer, which requires payments of certain benefits upon retirement. At June 30, 2020 and 2019, the accrued liability of the post-retirement compensation agreements was $6.1 million and $5.6 million, respectively; costs are being accrued and expensed annually. For fiscal 2020 and 2019, the accrued expense for these liabilities was $427,000 and $210,000, respectively. The current obligation for these post-retirement benefits was fully funded consistent with contractual requirements and actuarially determined estimates of the total future obligation. The Corporation invests in BOLI to provide sufficient funding for these post-retirement obligations. As of June 30, 2020 and 2019, the total outstanding cash surrender value of the BOLI was $7.8 million and $7.6 million, respectively. For fiscal 2020 and 2019, the total BOLI non-taxable income, net of mortality cost was $189,000 and $186,000, respectively. Employee Stock Ownership Plan The Corporation established an ESOP on June 27, 1996 for all employees who are age 21 or older and have completed one year of service with the Corporation during which they have served a minimum of 1,000 hours. The Corporation recognizes compensation expense when the Corporation contributes funds to the ESOP for the purchase of the Corporation’s common stock to be allocated to the ESOP participants. The Corporation's contribution to the ESOP plan is discretionary. During fiscal 2020, there were 32,000 shares that were purchased in the open market and no cash contributions to fulfill the annual discretionary allocation. This compares to fiscal 2019 when the Corporation purchased 28,000 shares in the open market and made $539,000 of cash contributions to fulfill the annual discretionary allocation. Since the annual contributions are discretionary, the benefits payable under the ESOP cannot be estimated. Benefits generally become 100% vested after six years of credited service. Vesting accelerates upon retirement, death or disability of the participant or in the event of a change in control of the Corporation. Forfeitures are reallocated among remaining participating employees in the same proportion as contributions. Benefits are payable upon death, retirement, early retirement, disability or separation from service. The net expense related to the ESOP for the years ended June 30, 2020 and 2019 was $602,000 and $1.1 million, respectively. Available shares and cash contributions, if any, are allocated every calendar year end; and the total allocated at December 31, 2019 were 40,000 shares and no cash contributions. This compares to 30,000 of shares and $539,000 of cash contributions allocated at December 31, 2018. 131 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 Note 12: Incentive Plans As of June 30, 2020, the Corporation had three share-based compensation plans, which are described below. These plans are the 2013 Equity Incentive Plan (“2013 Plan”), the 2010 Equity Incentive Plan (“2010 Plan”) and the 2006 Equity Incentive Plan (“2006 Plan”). For the years ended June 30, 2020 and 2019, the compensation cost for these plans was $954,000 and $869,000, respectively. Equity Incentive Plans. The Corporation established and the shareholders approved the 2013 Plan, the 2010 Plan and the 2006 Plan (collectively, the “Plans”) for directors, advisory directors, directors emeriti, officers and employees of the Corporation and its subsidiary. The 2013 Plan authorizes 300,000 stock options and 300,000 shares of restricted stock. The 2013 Plan also provides that no person may be granted more than 60,000 stock options or 45,000 shares of restricted stock in any one year. The 2010 Plan authorizes 586,250 stock options and 288,750 shares of restricted stock. The 2010 Plan also provides that no person may be granted more than 117,250 stock options or 43,312 shares of restricted stock in any one year. The 2006 Plan authorized 365,000 stock options and 185,000 shares of restricted stock. No new awards can be granted from the 2006 Plan. Equity Incentive Plans - Stock Options. Under the Plans, options may not be granted at a price less than the fair market value at the date of the grant. Options typically vest over a five-year or shorter period as long as the director, advisory director, director emeritus, officer or employee remains in service to the Corporation. The options are exercisable after vesting for up to the remaining term of the original grant. The maximum term of the options granted is 10 years. The fair value of each option grant is estimated using the Black-Scholes option valuation model with the following assumptions as of the grant date for the periods indicated. The expected volatility is based on implied volatility from historical common stock closing prices for the prior 84 months. The expected dividend yield is based on the most recent quarterly dividend on an annualized basis. The expected term is based on the historical experience of all fully vested stock option grants and is reviewed annually. The risk-free interest rate is based on the U.S. Treasury note rate with a term similar to the underlying stock option on the particular grant date. Fiscal 2020 Fiscal 2019 Expected volatility — % 16.5 % Weighted-average volatility — % 16.5 % Expected dividend yield — % 2.8 % Expected term (in years) — 7.5 Risk-free interest rate — % 2.1 % In fiscal 2020, there were no options granted under the Plans, while 16,250 options were exercised and no options were forfeited. In fiscal 2019, there were 90,000 options granted under the Plans, while 48,250 options were exercised and no options were forfeited. As of both June 30, 2020 and 2019, there were 57,500 options available for future grants under the Plans. 132 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 The following tables summarize the stock option activity in the Plans during the years ended June 30, 2020 and 2019: Options Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value ($000) Outstanding at June 30, 2018 529,000 $12.77 Granted 90,000 $20.19 Exercised (48,250 ) $11.45 Forfeited — $— Outstanding at June 30, 2019 570,750 $14.05 5.21 $ 3,960 Vested and expected to vest at June 30, 2019 550,150 $13.82 5.05 $ 3,942 Exercisable at June 30, 2019 467,750 $12.72 4.25 $ 3,870 Outstanding at June 30, 2019 570,750 $14.05 Granted — $— Exercised (16,250 ) $13.27 Forfeited — $— Outstanding at June 30, 2020 554,500 $14.07 4.22 $ 807 Vested and expected to vest at June 30, 2020 533,900 $13.84 4.06 $ 534 Exercisable at June 30, 2020 451,500 $12.70 3.23 $ 807 As of June 30, 2020 and 2019, there was $211,000 and $292,000 of unrecognized compensation expense, respectively, related to unvested share-based compensation arrangements with respect to stock options issued under the Plans. The expense is expected to be recognized over a weighted-average period of 2.6 years and 3.4 years, respectively. The forfeiture rate during both fiscal 2020 and 2019 was 20 percent, and was calculated by using the historical forfeiture experience of all fully vested stock option grants which is reviewed annually. Equity Incentive Plans – Restricted Stock. The Corporation used 300,000 shares, 288,750 shares and 185,000 shares of its treasury stock to fund awards of restricted stock under the 2013 Plan, the 2010 Plan and the 2006 Plan, respectively. Awarded shares typically vest over a five-year or shorter period as long as the director, advisory director, director emeriti, officer or employee remains in service to the Corporation. Once vested, a recipient of restricted stock will have all rights of a shareholder, including the power to vote and the right to receive dividends. The Corporation recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the award date. In fiscal 2020, no shares of restricted stock were awarded under the Plans or vested and distributed, while 8,000 shares were forfeited. In fiscal 2019, 224,500 shares of restricted stock were awarded under the Plans with 50% vesting after two years of service and 50% vesting after four years of service, while 89,500 shares were vested and distributed and no shares were forfeited. As of June 30, 2020 and 2019, there were 51,250 and 43,250 shares available for future awards under the Plans, respectively. No new awards can be granted from the 2006 Plan. 133 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 The following table summarizes the restricted stock activity for the years ended June 30, 2020 and 2019: Unvested Shares Shares Weighted-Average Award Date Fair Value Unvested at June 30, 2018 98,500 $14.35 Awarded 224,500 $18.57 Vested (89,500 ) $13.97 Forfeited — $— Unvested at June 30, 2019 233,500 $18.55 Expected to vest at June 30, 2019 186,800 $18.55 Unvested at June 30, 2019 233,500 $18.55 Awarded — $— Vested — $— Forfeited (8,000 ) $18.57 Unvested at June 30, 2020 225,500 $18.55 Expected to vest at June 30, 2020 180,400 $18.55 As of June 30, 2020 and 2019, the unrecognized compensation expense was $3.2 million and $4.2 million, respectively, related to unvested share-based compensation arrangements with respect to restricted stock issued under the Plans, and reported as a reduction to stockholders’ equity. This expense is expected to be recognized over a weighted-average period of 2.9 years and 3.9 years, respectively. Similar to stock options, a forfeiture rate of 20 percent has been applied to the restricted stock compensation expense calculations in fiscal 2020 and 2019. For the fiscal years ended June 30, 2020 and 2019, the fair value of shares vested and distributed was $0 and $1.6 million, respectively. Note 13: Earnings Per Share Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the earnings of the Corporation. As of June 30, 2020 and 2019, there were outstanding options to purchase 554,500 shares and 570,750 shares of the Corporation’s common stock, respectively, of which 419,500 shares and no shares, respectively, were excluded from the diluted EPS computation as their effect was anti-dilutive. As of June 30, 2020 and 2019, there were outstanding restricted stock awards of 225,500 shares and 233,500 shares, respectively. 134 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 The following table provides the basic and diluted EPS computations for the fiscal years ended June 30, 2020 and 2019, respectively: (Dollars in Thousands, Except Share Amount) For the Year Ended June 30, 2020 Income (Numerator) Shares (Denominator) Per-Share Amount Basic EPS $ 7,689 7,467,577 $ 1.03 Effect of dilutive shares: Stock options 71,307 Restricted stock 37,298 Diluted EPS $ 7,689 7,576,182 $ 1.01 (Dollars in Thousands, Except Share Amount) For the Year Ended June 30, 2019 Income (Numerator) Shares (Denominator) Per-Share Amount Basic EPS $ 4,417 7,484,925 $ 0.59 Effect of dilutive shares: Stock options 95,960 Restricted stock 15,383 Diluted EPS $ 4,417 7,596,268 $ 0.58 Note 14: Commitments and Contingencies Periodically, there have been various claims and lawsuits involving the Corporation, such as claims to enforce liens, condemnation proceedings on properties in which the Corporation holds security interests, claims involving the making and servicing of real property loans, employment matters and other issues in the ordinary course of and incidental to the Corporation’s business. These proceedings and the associated legal claims are often contested and the outcome of individual matters is not always predictable. Additionally, in some actions, it is difficult to assess potential exposure because the Corporation is still in the early stages of the litigation. The Corporation is not a party to any pending legal proceedings that it believes would have a material adverse effect on its financial condition, operations or cash flows. Cannon lawsuit: On August 6, 2015, a former employee, Christina Cannon, filed a lawsuit called Cannon vs. the Bank in the California Superior Court for the County of San Bernardino (the “Cannon lawsuit”). Cannon seeks to represent a class of all non-exempt employees in a class action lawsuit brought under California’s Unfair Competition Law, Business & Professions Code section 17200. The underlying claims include unpaid overtime (including off-the-clock work), meal and rest period violations, minimum wage violations, and failure to reimburse business expenses. On September 8, 2017, the attorneys for the plaintiffs in the Cannon lawsuit sent notification to the Bank and to the California Labor & Workforce Development Agency informing them of their intent to bring a claim under the Private Attorneys’ General Act of 2004 (“PAGA”) on behalf of all non-exempt employees and covering a variety of alleged wage and hour violations. On September 12, 2017, the Bank entered into a Memorandum of Understanding with the plaintiffs’ representatives to memorialize an agreement in principle to settle the pending Cannon lawsuit. The Memorandum of Understanding assumes class certification for purposes of the settlement only and provides for an 135 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 aggregate settlement payment by the Bank of up to $2.8 million, which includes all settlement funds, the class representative enhancement award, settlement administrator’s expenses, any employer-side payroll taxes, and class counsel’s attorneys’ fees and costs. The Bank’s decision to settle this matter was the result of the significant legal costs, distraction from day-to-day operating activities and substantial resources that would be required to defend the Bank in protracted litigation. In addition, the Bank determined that the settlement would reduce the Bank’s potential exposure to damages, penalties, fines and plaintiffs’ legal fees in the event of an unfavorable outcome in a court trial. The settlement includes the dismissal of all claims against the Bank and related parties in the Cannon lawsuit and claim under the PAGA, without any admission of liability or wrongdoing attributed to the Bank. Because of the uncertainty surrounding this litigation, no litigation reserve had been previously established by the Bank resulting in the full $2.8 million settlement expense being recognized in the first quarter of fiscal 2019. On December 20, 2018, counsel in the Cannon lawsuit filed a Motion for Preliminary Approval of the Settlement in the California Superior Court for the County of San Bernardino. On April 12, 2019, this court granted preliminary approval of the settlement. On July 24, 2019, the California Superior Court for the County of San Bernardino, California granted final approval of the settlement in the Cannon vs. Bank lawsuit. On July 26, 2019, the final order was signed by this court and on August 6, 2019, the Bank forwarded the settlement amount to the class administrator. The total settlement was reduced to $2.5 million from $2.8 million, resulting in a $296,000 settlement expense recovery which was recognized in the first quarter of fiscal 2020. The Corporation conducts a portion of its operations in leased facilities and has maintenance contracts under non-cancelable agreements classified as operating leases, which include leases recorded under ASC 842 on liabilities for future lease obligations as well as assets representing the right to use the underlying leased assets (See Note 5 of the Notes to Consolidated Financial Statements). The following is a schedule of the Corporation’s lease and operating commitments: Amount Year Ending June 30, (In Thousands) 2021 $ 1,712 2022 1,524 2023 672 2024 383 2025 279 Thereafter 281 Total minimum payments required $ 4,851 Lease and operating commitment expense was approximately $1.7 million and $3.9 million for the years ended June 30, 2020 and 2019, respectively. The Bank sold single-family mortgage loans to unrelated third parties with standard representation and warranty provisions in the ordinary course of its business activities. Under these provisions, the Bank is required to repurchase any previously sold loan for which the representations or warranties of the Bank prove to be inaccurate, incomplete or misleading. In the event of a borrower default or fraud, pursuant to a breached representation or warranty, the Bank may be required to reimburse the investor for any losses suffered. As of both June 30, 2020 and 2019, the Bank maintained a non-contingent recourse liability related to these representations and warranties of $200,000. In addition, the Bank maintained a recourse liability of $70,000 and $50,000 at June 30, 2020 and 2019, respectively, for loans sold to the FHLB – San Francisco under the MPF program. 136 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 In the ordinary course of business, the Corporation enters into contracts with third parties under which the third parties provide services on behalf of the Corporation. In many of these contracts, the Corporation agrees to indemnify the third party service provider under certain circumstances. The terms of the indemnity vary from contract to contract and the amount of the indemnification liability, if any, cannot be determined. The Corporation also enters into other contracts and agreements; such as, loan sale agreements, litigation settlement agreements, confidentiality agreements, loan servicing agreements, leases and subleases, among others, in which the Corporation agrees to indemnify third parties for acts by the Corporation’s agents, assignees and/or sub-lessees, and employees. Due to the nature of these indemnification provisions, the Corporation cannot calculate its aggregate potential exposure. Pursuant to their governing instruments, the Corporation and its subsidiaries provide indemnification to directors, officers, employees and, in some cases, agents of the Corporation against certain liabilities incurred as a result of their service on behalf of or at the request of the Corporation and its subsidiaries. It is not possible for the Corporation to determine the aggregate potential exposure resulting from the obligation to provide this indemnity. Note 15: Derivative and Other Financial Instruments with Off-Balance Sheet Risks The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of originating loans or providing funds under existing lines of credit, loan sale commitments to third parties and option contracts. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the accompanying Consolidated Statements of Financial Condition. The Corporation’s exposure to credit loss, in the event of non-performance by the counterparty to these financial instruments, is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in entering into financial instruments with off-balance sheet risk as it does for on-balance sheet instruments. As of June 30, 2020 and 2019, the Corporation had commitments to extend credit on loans to be held for investment of $13.6 million and $4.3 million, respectively. The following table provides information at the dates indicated regarding undisbursed funds to borrowers on existing lines of credit with the Corporation as well as commitments to originate loans to be held for investment at the dates indicated below: June 30, Commitments 2020 2019 (In Thousands) Undisbursed loan funds – Construction loans $ 4,029 $ 6,592 Undisbursed lines of credit – Commercial business loans 935 1,003 Undisbursed lines of credit – Consumer loans 448 479 Commitments to extend credit on loans to be held for investment 13,579 4,254 Total $ 18,991 $ 12,328 137 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 The following table provides information regarding the allowance for loan losses for the undisbursed funds and commitments to extend credit on loans to be held for investment for the years ended June 30, 2020 and 2019: Year Ended June 30, (In Thousands) 2020 2019 Balance, beginning of the year $ 141 $ 157 Recovery (15 ) (16 ) Balance, end of the year $ 126 $ 141 Consistent with the Corporation’s announcement on February 4, 2019 to scale back the origination of saleable single-family mortgage loans and improve on its efforts to increase the volume of portfolio single-family mortgage loan originations, the Corporation does not have any outstanding derivative and other financial instruments as of June 30, 2020 and 2019. In accordance with ASC 815, “Derivatives and Hedging,” and interpretations of the Derivatives Implementation Group of the FASB, the fair value of the commitments to extend credit on loans to be held for sale, loan sale commitments, TBA MBS trades, put option contracts and call option contracts are recorded at fair value on the Consolidated Statements of Financial Condition. At June 30, 2020 and 2019, there were no fair value derivative balances included in other assets and other liabilities. The Corporation does not apply hedge accounting to its derivative financial instruments; therefore, all changes in fair value are recorded in the Consolidated Statements of Operations. The net impact of derivative financial instruments on the gain (loss) on sale of loans contained in the Consolidated Statements of Operations for the years ended June 30, 2020 and 2019 was as follows: Year Ended June 30, Derivative Financial Instruments 2020 2019 Commitments to extend credit on loans to be held for sale $ — $ (825 ) Mandatory loan sale commitments and TBA MBS trades — 440 Total net loss $ — $ (385 ) Note 16: Fair Value of Financial Instruments The Corporation adopted ASC 820, “Fair Value Measurements and Disclosures,” and elected the fair value option pursuant to ASC 825, “Financial Instruments” on single-family loans originated for sale. ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 825 permits entities to elect to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the “Fair Value Option”) at specified election dates. At each subsequent reporting date, an entity is required to report unrealized gains and losses on items in earnings for which the fair value option has been elected. The objective of the Fair Value Option is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. 138 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 The following table describes the difference at the dates indicated between the aggregate fair value and the aggregate unpaid principal balance of loans held for investment at fair value: (In Thousands) Aggregate Fair Value Aggregate Unpaid Principal Balance Net Unrealized Loss As of June 30, 2020: Loans held for investment, at fair value $ 2,258 $ 2,369 $ (111 ) As of June 30, 2019: Loans held for investment, at fair value $ 5,094 $ 5,218 $ (124 ) ASC 820 establishes a three-level valuation hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as follows: Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date. Level 2 - Observable inputs other than Level 1 such as: quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated to observable market data for substantially the full term of the asset or liability. Level 3 - Unobservable inputs for the asset or liability that use significant assumptions, including assumptions of risks. These unobservable assumptions reflect the Corporation’s estimate of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of pricing models, discounted cash flow models and similar techniques. ASC 820 requires the Corporation to maximize the use of observable inputs and minimize the use of unobservable inputs. If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation. The Corporation’s financial assets and liabilities measured at fair value on a recurring basis consist of investment securities available for sale, loans held for investment at fair value, interest-only strips and derivative financial instruments; while non-performing loans, MSA and real estate owned are measured at fair value on a nonrecurring basis. Investment securities - available for sale are primarily comprised of U.S. government agency MBS, U.S. government sponsored enterprise MBS and privately issued CMO. The Corporation utilizes quoted prices in active markets for similar securities for its fair value measurement of MBS (Level 2) and broker price indications for similar securities in non-active markets for its fair value measurement of the CMO (Level 3). Loans held for investment at fair value are primarily single-family loans which have been transferred from loans held for sale. The fair value is determined by management estimates of the specific credit risk attributes of each loan, in addition to the quoted secondary-market prices which account for the interest rate characteristics of each loan (Level 3). 139 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 Non-performing loans are loans which are inadequately protected by the current sound worth and paying capacity of the borrowers or of the collateral pledged. The non-performing loans are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. The fair value of a non-performing loan is determined based on an observable market price or current appraised value of the underlying collateral. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the collateral. For non-performing loans which are restructured loans, the fair value is derived from discounted cash flow analysis (Level 3), except those which are in the process of foreclosure or 90 days delinquent for which the fair value is derived from the appraised value of its collateral (Level 2). For other non-performing loans which are not restructured loans, other than non-performing commercial real estate loans, the fair value is derived from relative value analysis: historical experience and management estimates by loan type for which collectively evaluated allowances are assigned (Level 3); or the appraised value of its collateral for loans which are in the process of foreclosure or where borrowers file bankruptcy (Level 2). For non-performing commercial real estate loans, the fair value is derived from the appraised value of its collateral (Level 2). Non-performing loans are reviewed and evaluated on at least a quarterly basis for additional allowance and adjusted accordingly, based on the same factors identified above. This loss is not recorded directly as an adjustment to current earnings or other comprehensive income (loss), but rather as a component in determining the overall adequacy of the allowance for loan losses. These adjustments to the estimated fair value of non-performing loans may result in increases or decreases to the provision for loan losses recorded in current earnings. The Corporation uses the amortization method for its MSA, which amortizes the MSA in proportion to and over the period of estimated net servicing income and assesses the MSA for impairment based on fair value at each reporting date. The fair value of the MSA is derived using the present value method; which includes a third party’s prepayment projections of similar instruments, weighted-average coupon rates, estimated servicing costs and discount interest rates (Level 3). The fair value of interest-only strips is derived using the same assumptions that are used to value the related MSA (Level 3). The Corporation’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Corporation’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. 140 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 The following fair value hierarchy table presents information at the dates indicated about the Corporation’s assets measured at fair value on a recurring basis: Fair Value Measurement at June 30, 2020 Using: (In Thousands) Level 1 Level 2 Level 3 Total Assets: Investment securities - available for sale: U.S. government agency MBS $ — $ 2,943 $ — $ 2,943 U.S. government sponsored enterprise MBS — 1,577 — 1,577 Private issue CMO — — 197 197 Investment securities - available for sale — 4,520 197 4,717 Loans held for investment, at fair value — — 2,258 2,258 Interest-only strips — — 14 14 Total assets $ — $ 4,520 $ 2,469 $ 6,989 Liabilities: $ — $ — $ — $ — Total liabilities $ — $ — $ — $ — Fair Value Measurement at June 30, 2019 Using: (In Thousands) Level 1 Level 2 Level 3 Total Assets: Investment securities - available for sale: U.S. government agency MBS $ — $ 3,613 $ — $ 3,613 U.S. government sponsored enterprise MBS — 2,087 — 2,087 Private issue CMO — — 269 269 Investment securities - available for sale — 5,700 269 5,969 Loans held for investment, at fair value — — 5,094 5,094 Interest-only strips — — 16 16 Total assets $ — $ 5,700 $ 5,379 $ 11,079 Liabilities: $ — $ — $ — $ — Total liabilities $ — $ — $ — $ — 141 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 The following is a reconciliation of the beginning and ending balances during the periods shown of recurring fair value measurements recognized in the Consolidated Statements of Financial Condition using Level 3 inputs: Fair Value Measurement Using Significant Other Unobservable Inputs (Level 3) (In Thousands) Private Issue CMO Loans Held For Investment, at fair value (1) Interest- Only Strips Total Beginning balance at June 30, 2019 $ 269 $ 5,094 $ 16 $ 5,379 Total gains or losses (realized/ unrealized): Included in earnings — 13 — 13 Included in other comprehensive income (loss) (14 ) — (2 ) (16 ) Purchases — — — — Issuances — — — — Settlements (58 ) (2,849 ) — (2,907 ) Transfers in and/or out of Level 3 — — — — Ending balance at June 30, 2020 $ 197 $ 2,258 $ 14 $ 2,469 (1) The valuation of loans held for investment at fair value includes management estimates of the specific credit risk attributes of each loan, in addition to the quoted secondary-market prices which account for interest rate characteristics. 142 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 Fair Value Measurement Using Significant Other Unobservable Inputs (Level 3) (In Thousands) Private Issue CMO Loans Held For Investment, at fair value (1) Interest- Only Strips Loan Commit- ments to Originate (2) Manda- tory Commit- ments (3) Total Beginning balance at June 30, 2018 $ 350 $ 5,234 $ 23 $ 825 $ (32 ) $ 6,400 Total gains or losses (realized/ unrealized): Included in earnings — 188 — (825 ) 19 (618 ) Included in other comprehensive income (loss) 4 — (7 ) — — (3 ) Purchases — — — — — — Issuances — — — — — — Settlements (85 ) (1,288 ) — — 13 (1,360 ) Transfers in and/or out of Level 3 — 960 — — — 960 Ending balance at June 30, 2019 $ 269 $ 5,094 $ 16 $ — $ — $ 5,379 (1) The valuation of loans held for investment at fair value includes management estimates of the specific credit risk attributes of each loan, in addition to the quoted secondary-market prices which account for interest rate characteristics. (2) Consists of commitments to extend credit on loans to be held for sale. (3) Consists of mandatory loan sale commitments. The following fair value hierarchy table presents information about the Corporation’s assets measured at fair value at the dates indicated on a nonrecurring basis: Fair Value Measurement at June 30, 2020 Using: (In Thousands) Level 1 Level 2 Level 3 Total Non-performing loans $ — $ 2,042 $ 2,882 $ 4,924 Mortgage servicing assets — — 382 382 Real estate owned, net — — — — Total $ — $ 2,042 $ 3,264 $ 5,306 Fair Value Measurement at June 30, 2019 Using: (In Thousands) Level 1 Level 2 Level 3 Total Non-performing loans $ — $ 3,971 $ 2,247 $ 6,218 Mortgage servicing assets — — 627 627 Real estate owned, net — — — — Total $ — $ 3,971 $ 2,874 $ 6,845 143 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 The following table presents additional information about valuation techniques and inputs used for assets and liabilities, including derivative financial instruments, which are measured at fair value and categorized within Level 3 as of June 30, 2020: (Dollars In Thousands) Fair Value As of June 30, 2020 Valuation Techniques Unobservable Inputs Range (1) (Weighted Average) Impact to Valuation from an Increase in Inputs (2) Assets: Securities available-for sale: Private issue CMO $ 197 Market comparable pricing Comparability adjustment (3.2)% - (3.5)% ((3.3)%) Increase Loans held for investment, at fair value $ 2,258 Relative value analysis Broker quotes Credit risk factor 98.0% - 106.1% (101.5%) of par 1.4% - 100.0% (6.2%) Increase Decrease Non-performing loans (3) $ 1,573 Discounted cash flow Default rates 5.0% Decrease Non-performing loans (4) $ 1,309 Relative value analysis Credit risk factor 20.0% - 30.0% (20.1%) Decrease Mortgage servicing assets $ 382 Discounted cash flow Prepayment speed (CPR) Discount rate 18.3% - 60.0% (26.1%) 9.0% - 10.5% (9.1%) Decrease Decrease Interest-only strips $ 14 Discounted cash flow Prepayment speed (CPR) Discount rate 18.3% - 24.2% (23.8%) 9.0% Decrease Decrease Liabilities: None (1) The range is based on the historical estimated fair values and management estimates. (2) Unless otherwise noted, this column represents the directional change in the fair value of the Level 3 investments that would result from an increase to the corresponding unobservable input. A decrease to the unobservable input would have the opposite effect. Significant changes in these inputs in isolation could result in significantly higher or lower fair value measurements. (3) Consist of restructured loans. (4) Consist of other non-performing loans, excluding restructured loans. The significant unobservable inputs used in the fair value measurement of the Corporation’s assets and liabilities include the following: CMO offered quotes, prepayment speeds and discount rates, among others. Significant increases or decreases in any of these inputs in isolation could result in significantly lower or higher fair value measurement. The various unobservable inputs used to determine valuations may have similar or diverging impacts on valuation. For the fiscal year ended June 30, 2020, there were no significant changes to the Corporation’s valuation techniques and inputs that had, or are expected to have, a material impact on its consolidated financial position or results of operations. 144 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 The carrying amount and fair value of the Corporation’s other financial instruments as of June 30, 2020 and 2019 were as follows: June 30, 2020 (In Thousands) Carrying Amount Fair Value Level 1 Level 2 Level 3 Financial assets: Loans held for investment, not recorded at fair value $ 900,538 $ 902,074 $ — $ — $ 902,074 Investment securities - held to maturity $ 118,627 $ 121,201 $ — $ 121,201 $ — FHLB – San Francisco stock $ 7,970 $ 7,970 $ — $ 7,970 $ — Financial liabilities: Deposits $ 892,969 $ 864,239 $ — $ — $ 864,239 Borrowings $ 141,047 $ 149,976 $ — $ — $ 149,976 June 30, 2019 (In Thousands) Carrying Amount Fair Value Level 1 Level 2 Level 3 Financial assets: Loans held for investment, not recorded at fair value $ 874,831 $ 861,374 $ — $ — $ 861,374 Investment securities - held to maturity $ 94,090 $ 95,359 $ — $ 95,359 $ — FHLB – San Francisco stock $ 8,199 $ 8,199 $ — $ 8,199 $ — Financial liabilities: Deposits $ 841,271 $ 813,087 $ — $ — $ 813,087 Borrowings $ 101,107 $ 102,826 $ — $ — $ 102,826 Loans held for investment, not recorded at fair value: For loans that reprice frequently at market rates, the carrying amount approximates the fair value. For fixed-rate loans, the fair value is determined by either (i) discounting the estimated future cash flows of such loans over their estimated remaining contractual maturities using a current interest rate at which such loans would be made to borrowers, or (ii) quoted market prices. Investment securities - held to maturity: The investment securities - held to maturity consist of time deposits at CRA qualified minority financial institutions, U.S. SBA securities and U.S. government sponsored enterprise MBS. Due to the short-term nature of the time deposits, the principal balance approximated fair value (Level 2). For the MBS and the U.S. SBA securities, the Corporation utilizes quoted prices in active markets for similar securities for its fair value measurement (Level 2). FHLB – San Francisco stock: The carrying amount reported for FHLB – San Francisco stock approximates fair value. When redeemed, the Corporation will receive an amount equal to the par value of the stock. Deposits: The fair value of time deposits is estimated using a discounted cash flow calculation. The discount rate is based upon rates currently offered for deposits of similar remaining maturities. The fair value of transaction accounts (checking, money 145 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 market and savings accounts) is estimated using a discounted cash flow calculation and management estimates of current market conditions. Borrowings: The fair value of borrowings has been estimated using a discounted cash flow calculation. The discount rate on such borrowings is based upon rates currently offered for borrowings of similar remaining maturities. The Corporation has various processes and controls in place to ensure that fair value is reasonably estimated. The Corporation generally determines fair value of their Level 3 assets and liabilities by using internally developed models which primarily utilize discounted cash flow techniques and prices obtained from independent management services or brokers. The Corporation performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process. While the Corporation believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. For the fiscal year ended June 30, 2020, there were no significant changes to the Corporation’s valuation techniques that had, or are expected to have, a material impact on its consolidated financial position or results of operations. Note 17: Revenue From Contracts With Customers In accordance with ASC 606, revenues are recognized when goods or services are transferred to the customer in exchange for the consideration the Corporation expects to be entitled to receive. The largest portion of the Corporation’s revenue is from interest income, which is not in the scope of ASC 606. All of the Corporation’s revenue from contracts with customers in the scope of ASC 606 is recognized in non-interest income. If a contract is determined to be within the scope of ASC 606, the Corporation recognizes revenue as it satisfies a performance obligation. Payments from customers are generally collected at the time services are rendered, monthly, or quarterly. For contracts with customers within the scope of ASC 606, revenue is either earned at a point in time or revenue is earned over time. Examples of revenue earned at a point in time are automated teller machine ("ATM") transaction fees, wire transfer fees, overdraft fees and interchange fees. Revenue is primarily based on the number and type of transactions that are generally derived from transactional information accumulated by the bank’s systems and is recognized immediately as the transactions occur or upon providing the service to complete the customer's transaction. The Corporation is generally the principal in these contracts, with the exception of interchanges fees, in which case the Corporation is acting as the agent and records revenue net of expenses paid to the principal. Examples of revenue earned over time, which generally occur on a monthly basis, are deposit account maintenance fees, investment advisory fees, merchant revenue, trust and investment management fees and safe deposit box fees. Revenue is generally derived from transactional information accumulated by its systems or those of third-parties and is recognized as the related transactions occur or services are rendered to the customer. 146 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 Disaggregation of Revenue: The following table includes the Corporation's non-interest income disaggregated by type of services for the fiscal years ended June 30, 2020 and 2019: Year Ended June 30, Type of Services 2020 2019 (In Thousands) Loan servicing and other fees (1) $ 819 $ 1,051 Gain (loss) on sale of loans, net (1) (132 ) 7,135 Deposit account fees 1,610 1,928 Card and processing fees 1,454 1,568 Other (2) 769 829 Total non-interest income $ 4,520 $ 12,511 (1) Not in scope of ASC 606. (2) Includes BOLI of $189 and $186 for the year ended June 30, 2020 and 2019, respectively, which are not in scope of ASC 606. For the fiscal years ended June 30, 2020 and 2019, substantially all of the Corporation's revenues within the scope of ASC 606 are for performance obligations satisfied at a specified date. Revenues recognized in scope of ASC 606: Deposit account fees : Fees are earned on the Bank's deposit accounts for various products offered to or services performed for the Bank's customers. Fees include business account fees, non-sufficient fund fees, ATM fees and others. These fees are recognized on a daily, monthly or quarterly basis, depending on the type of service. Card and processing fees : Debit interchange income represents fees earned when a debit card issued by the Bank is used. The Bank earns interchange fees from cardholder transactions through a third party payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders' debit card. Certain expenses directly associated with the debit cards are recorded on a net basis with the interchange income. Other : Includes asset management fees, certain loan related fees, stop payment fees, wire services fees, safe deposit box fees and other fees earned on other services, such as merchant services or occasional non-recurring type services, are recognized at the time of the event or the applicable billing cycle. Asset management fees are variable, since they are based on the underlying portfolio value, which is subject to market conditions and amounts invested by customers through a third-party provider. Asset management fees are recognized over the period that services are provided, and when the portfolio values are known or can be estimated at the end of each month. Loan related fees include prepayment fees, late charges, brokered loan fees, maintenance fees and others. These fees are recognized on a daily, monthly, quarterly or annual basis, depending on the type of service. 147 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 Note 18: Holding Company Condensed Financial Information This information should be read in conjunction with the other notes to the consolidated financial statements. The following is the condensed statements of financial condition for Provident Financial Holdings (Holding Company only) as of June 30, 2020 and 2019 and condensed statements of operations, comprehensive income and cash flows for the fiscal years ended June 30, 2020 and 2019. Condensed Statements of Financial Condition June 30, (In Thousands) 2020 2019 Assets Cash and cash equivalents $ 6,842 $ 5,421 Investment in subsidiary 117,080 115,185 Other assets 108 131 $ 124,030 $ 120,737 Liabilities and Stockholders’ Equity Other liabilities $ 54 $ 96 Stockholders’ equity 123,976 120,641 $ 124,030 $ 120,737 Condensed Statements of Operations Year Ended June 30, (In Thousands) 2020 2019 Dividend from the Bank $ 7,500 $ 7,500 Interest and other income 19 17 Total income 7,519 7,517 General and administrative expenses 1,166 1,209 Earnings before income taxes and equity in undistributed earnings of the Bank 6,353 6,308 Income tax benefit (338 ) (352 ) Earnings before equity in undistributed earnings of the Bank 6,691 6,660 Equity in undistributed earnings of the Bank 998 (2,243 ) Net income $ 7,689 $ 4,417 148 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 Condensed Statements of Cash Flows Year Ended June 30, (In Thousands) 2020 2019 Cash flow from operating activities: Net income $ 7,689 $ 4,417 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of the Bank (998 ) 2,243 Decrease (increase) in other assets 23 (8 ) (Decrease) increase in other liabilities (42 ) 33 Net cash provided by operating activities 6,672 6,685 Cash flow from financing activities: Exercise of stock options 215 553 Treasury stock purchases (1,283 ) (1,412 ) Cash dividends (4,183 ) (4,194 ) Net cash used for financing activities (5,251 ) (5,053 ) Net increase in cash and cash equivalents 1,421 1,632 Cash and cash equivalents at beginning of year 5,421 3,789 Cash and cash equivalents at end of year $ 6,842 $ 5,421 149 Provident Financial Holdings, Inc. Notes to Consolidated Financial Statements June 30, 2020 Note 19: Reclassification Adjustment of Accumulated Other Comprehensive Income ("AOCI") The following table provides the changes in AOCI by component for the fiscal years ended June 30, 2020 and 2019: Unrealized Gains and Losses on (Dollars In Thousands, Net of Statutory Taxes) Investment Securities Available for Sale Interest-Only Strips Total Beginning balance at June 30, 2018 $ 194 $ 16 $ 210 Other comprehensive loss before reclassifications (44 ) (5 ) (49 ) Amount reclassified from accumulated other comprehensive income — — — Net other comprehensive loss (44 ) (5 ) (49 ) Ending balance at June 30, 2019 $ 150 $ 11 $ 161 Other comprehensive loss before reclassifications (56 ) (1 ) (57 ) Amount reclassified from accumulated other comprehensive income — — — Net other comprehensive loss (56 ) (1 ) (57 ) Ending balance at June 30, 2020 $ 94 $ 10 $ 104 Note 20: Subsequent Event On July 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 August 20, 2020 are entitled to receive the cash dividend, which is payable on September 10, 2020. 150