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Item 7. Management’s Discussion and Analysis

2022-09-02 compared with 2021-09-03 · 128 added, 164 removed, 284 unchanged (51% of the section changed)

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Factors which could cause actual results to differ materially include, but are not limited to the following:

the effect of the COVID-19 pandemic, including on the Corporation’s credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S.

and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity;

potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, generally, resulting from the ongoing novel coronavirus of 2019 (“COVID-19”) and any governmental or societal responses thereto;

the credit risks of lending activities, including changes in the level and trend of loan delinquencies and charge-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the residential and commercial real estate markets and may lead to increased losses and non-performing assets and may result in our allowance for loan losses not being adequate to cover actual losses and require us to materially increase our reserve;

changes in general economic conditions, either nationally or in our market areas;

changes in general economic conditions, including the effects of inflation, either nationally or in our market areas;

changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;

uncertainty regarding the future of LIBOR, and the potential transition away from LIBOR toward new interest rate benchmarks;

the future of LIBOR, and the transition away from LIBOR toward new interest rate benchmarks;

fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas;

results of examinations of the Corporation by the FRB or of the Bank by the OCC or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to enter into a formal enforcement action or to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements and restrictions on us, any of which could adversely affect our liquidity and earnings;

legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules, including as a result of Basel III;

the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the California Consumer Privacy Act and the implementing regulations;

legislative or regulatory changes that adversely affect our business including changes in banking, securities and tax law, and in regulatory policies and principles, or the interpretation of regulatory capital or other rules, and including changes as a result of COVID-19;

the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;

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changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;

including as a result of the CARES Act as amended by the CAA and the related Interagency Statement;

war or terrorist activities;

and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services, including as a result of COVID-19 and recent COVID-19 vaccination and economic stimulus efforts, and other risks detailed in this report and in the Corporation’s other reports filed with or furnished to the U.S.

and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and other risks detailed in this report and in the Corporation’s other reports filed with or furnished to the U.S.

Securities and Exchange Commission (“SEC”).

These developments could have an adverse impact on our financial position and our results of operations.

Forward-looking statements are based upon

management’s beliefs and assumptions at the time they are made.

Forward-looking statements are based upon management’s beliefs and assumptions at the time they are made.

We undertake no obligation to publicly update or revise any forward-looking statements included in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise.

In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur, and you should not put undue reliance on any forward-looking statements.

In light of these risks, uncertainties and

assumptions, the forward-looking statements discussed in this document might not occur, and you should not put undue reliance on any forward-looking statements.

These risks could cause our actual results for fiscal 2023 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us and could negatively affect the Corporation’s consolidated financial condition and consolidated results of operations as well as its stock price performance.

Provident Financial Holdings, Inc., a Delaware corporation, was organized in January 1996 for the purpose of becoming the holding company of Provident Savings Bank, F.S.B.

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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 changes to qualitative factors such as unemployment data, gross domestic product, interest rates, retail sales, the value of real estate and real estate market conditions.

The Corporation also applies qualitative loss

factors by assessing general economic indicators such as gross domestic product, retail sales, unemployment rates, employment growth, California home sales and median California home prices, as well as peer group data, reflecting the effect of events that have occurred but are not yet evidenced in the historical data.

The historical data is reviewed at least quarterly and adjustments are made as needed.

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For non-performing commercial real estate loans, an individually evaluated allowance is calculated based on the loan's fair value and if the fair value is higher than the individual loan balance, no allowance is required.

A troubled debt restructuring (“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.

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.

The loan terms which have been modified or restructured due to a borrower’s financial difficulty, include but are not limited to:

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The Corporation measures the allowance for loan losses of restructured loans based on the difference between the original loan’s carrying amount and the present value of expected future cash flows discounted at the original effective yield of the loan.

Based on published guidance with respect to restructured loans from certain banking regulators and to conform to general practices within the banking industry, the Corporation determined it was appropriate to maintain certain restructured loans on accrual status because there is reasonable assurance of repayment and performance, consistent with the modified terms based upon a current, well-documented credit evaluation.

Based on published guidance with respect to restructured loans from certain banking regulators and to conform to general practices within the banking industry, the Corporation may determine that it is appropriate to maintain certain restructured loans on accrual status because 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 loans may be upgraded and placed on accrual status once there is a sustained period of payment performance (usually six months or, for loans that have been restructured more than once, 12 months) and there is a reasonable assurance that the payments will continue;

and if the borrower has demonstrated satisfactory contractual payments beyond 12 consecutive months, the loan is no longer categorized as a restructured loan.

In addition to the payment history described above, multi-family, commercial real estate, construction and commercial business loans must also demonstrate a combination of corroborating

characteristics to be upgraded, such as:

and if the borrower has demonstrated satisfactory contractual payments beyond 12 consecutive months, the loan is no

longer categorized as a restructured loan.

In addition to the payment history described above, multi-family, commercial real estate, construction and commercial business loans must also demonstrate a combination of corroborating characteristics to be upgraded, such as:

satisfactory cash flow, satisfactory guarantor support, and additional collateral support, among others.

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During the next three years, subject to market conditions, the Corporation intends to improve its community banking business by moderately increasing total assets (by increasing single-family, multi-family, commercial real estate, construction and commercial business loans).

In addition, the Corporation intends to decrease the percentage of time

deposits in its deposit base and to increase the percentage of lower cost checking and savings accounts.

In addition, the Corporation intends to decrease the percentage of time deposits in its deposit base and to increase the percentage of lower cost checking and savings accounts.

This strategy is intended to improve core revenue through a higher net interest margin and ultimately, coupled with the growth of the Corporation, an increase in net interest income.

While the Corporation’s long-term strategy is for moderate growth, management recognizes that growth may be difficult as a result of weaknesses in general economic conditions.

Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown until the pandemic subsides, the Corporation expects its net interest income and net interest margin will be adversely affected in fiscal 2022 and possibly longer.

While the Corporation’s long-term strategy is for moderate growth, management recognizes that growth may be affected by the COVID-19 pandemic and its impact to general economic conditions.

Investment services operations primarily consist of selling alternative investment products such as annuities and mutual funds to the Bank’s depositors.

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For further details on risk factors and uncertainties, see “Safe-Harbor Statement” included above in this Item 7, and Item 1A, "Risk Factors.”

COVID-19 Impact to the Corporation

The Corporation is actively monitoring and responding to the effects of the rapidly-changing COVID-19 pandemic.

The Centers of Disease Control and Prevention (“CDC”) guidelines, as well as directives from federal, state, county and local officials, are being closely followed to make informed operational decisions.

During the COVID-19 pandemic, the health, safety and well-being of its customers, employees and communities and providing uninterrupted access to services are top priorities for the Corporation.

All of the Corporation’s banking centers are open for business with regular business hours while implementing CDC guidelines and enhanced cleaning.

Customers can also conduct their banking business using drive thrus, online and mobile banking services, ATMs, and telephone banking.

The Corporation is aware of the recent surge in COVID-19 infections arising out of the so-called Delta variant and is prepared to restore social distancing and other protocols, as may prove to be necessary.

As of June 30, 2021, the Corporation had three single-family forbearance loans, with outstanding balances of $897,000 or 0.11 percent of total loans and one commercial real estate loan with an outstanding balance of $945,000 or 0.11 percent of total loans that remain modified in accordance with the CARES Act and Interagency Statement.

As of March 31, 2021, the Corporation no longer offered the COVID-19 forbearance relief program;

and as of June 30, 2021, the Corporation had no pending requests for payment relief.

In accordance with the CARES Act and Interagency Statement, since these loans were current on their payments prior to the COVID-19 pandemic, these modifications are not considered troubled debt restructurings through the earlier of January 1, 2022, or 60 days after the national emergency terminates.

Loan modifications in accordance with the CARES Act and Interagency Statement are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired.

For additional information, see Note 3 of the Notes to Consolidated Financial Statements.

For customers that needed access to funds in their certificates of deposit to assist with living expenses during the COVID-19 pandemic, the Corporation waived early withdrawal penalties on a case by case basis.

Overdraft and other fees were also waived on a case-by-case basis.

These special fee waivers ended on March 31, 2021.

The Corporation anticipates that the COVID-19 pandemic may continue to impact the business in future periods in one or more of the following ways, among others:

● Higher provisions for certain commercial real estate loans may be incurred, especially to borrowers with tenants in industries, such as hospitality, travel, food service and restaurants and bars, and businesses providing physical services;

● Significantly lower market interest rates which may have a negative impact on variable rate loans indexed to LIBOR, SOFR, U.S.

treasury and prime indices and on deposit pricing, as interest rate adjustments typically lag the effect on the yield earned on interest-earning assets because rates on many deposit accounts are decision-based, not tied to a specific market-based index, and are based on competition for deposits;

● Non-interest income may decline due to a decrease in fees earned as spending habits change by debit card customers complying with COVID-19 governmental safety requirements and who otherwise may be adversely affected by reductions in their personal income or job losses;

● Non-interest expenses related to the effects of the COVID-19 pandemic may increase, including cleaning costs, supplies, equipment and other items;

● Additional loan modifications may occur and borrowers may default on their loans, which may necessitate further increases to the allowance for loan losses.

While the full impact of COVID-19 on the Corporation's future financial results is uncertain and not currently estimable, the Corporation believes that the impact could be materially adverse to its financial condition and results of operations depending on the length and severity of the economic downturn brought on by the COVID-19 pandemic.

Off-Balance Sheet Financing Arrangements

Commitments and Derivative Financial Instruments.

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.

These financial instruments include commitments to extend credit, in the form of originating loans or providing funds under existing lines of credit.

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.

For a discussion on commitments and derivative financial instruments, see Note 15 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

Off-balance sheet arrangements.

The Bank 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.

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 Bank's exposure to credit loss, in the event of non-performance by the counter party to these financial instruments, is represented by the contractual amount of these instruments.

The Bank uses the same credit policies in making commitments to extend credit as it does for on-balance sheet instruments.

As of June 30, 2021 and 2020, these commitments were $21.9 million and $13.6 million, respectively.

For a discussion on financial instruments with off-balance sheet risks, see Note 15 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

Comparison of Financial Condition at June 30, 2022 and 2021

Total assets increased $6.8 million, or 1%, to $1.18 billion at June 30, 2021 from June 30, 2020.

The increase was primarily attributable to an increase in investment securities, partly offset by decreases in loans held for investment and cash and cash equivalents.

Total assets increased slightly to $1.19 billion at June 30, 2022 from $1.18 billion at June 30, 2021.

The increase was primarily attributable to an increase in loans held for investment, partly offset by decreases in cash and cash equivalents and investment securities.

Total cash and cash equivalents, primarily excess cash deposited with the Federal Reserve Bank of San Francisco, decreased $46.9 million, or 67%, to $23.4 million at June 30, 2022 from $70.3 million at June 30, 2021.

The decrease was primarily attributable to the utilization of cash to fund purchases of investment securities and to pay off borrowings.

The decrease was primarily attributable to the utilization of cash to fund loans held for investment.

The balance of cash and cash equivalents at June 30, 2022 was consistent with the Corporation’s strategy of adequately managing credit and liquidity risk.

Total investment securities (held to maturity and available for sale) increased $103.6 million, or 84%, to $226.9 million at June 30, 2021 from $123.3 million at June 30, 2020.

The increase was primarily the result of purchases of mortgage-backed securities held to maturity, partly offset by scheduled and accelerated principal payments on mortgage-backed securities.

Total investment securities (held to maturity and available for sale) decreased $38.5 million, or 17%, to $188.4 million at June 30, 2022 from $226.9 million at June 30, 2021.

The decrease was primarily the result of scheduled and accelerated principal payments on investment securities, partly offset by purchases of investment securities held to maturity.

For additional information on investment securities, see Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

Loans held for investment decreased $51.8 million, or 6% to $851.0 million at June 30, 2021 from $902.8 million at June 30, 2020.

In fiscal 2021, the Corporation originated $215.0 million of loans held for investment, consisting primarily of single-family and multi-family loans, up 103% from $106.0 million, consisting primarily of single-family, multi-family and commercial real estate loans, for the same period last year.

In addition, the Corporation purchased $16.9 million of loans to be held for investment (primarily single-family and multi-family loans) in fiscal 2021, down 88% from $142.1 million of purchased loans to be held for investment (primarily single-family and multi-family loans) in fiscal 2020.

Total loan principal payments in fiscal 2021 were $281.5 million, up 23% from $228.3 million in fiscal 2020.

Loans held for investment increased $89.0 million, or 10% to $940.0 million at June 30, 2022 from $851.0 million at June 30, 2021.

In fiscal 2022, the Corporation originated $299.8 million of loans held for investment, consisting primarily of single-family, multi-family and commercial real estate loans, up 39% from $215.0 million, consisting primarily of single-family and multi-family loans, for fiscal 2021.

In addition, the Corporation purchased $6.4 million of loans to be held for investment (solely comprised of single-family loans) in fiscal 2022, down 62% from $16.9 million of purchased loans to be held for investment (consisting of single-family and multi-family loans) in fiscal 2021.

Total loan principal payments in fiscal 2022 were $221.3 million, down 21% from $281.5 million in fiscal 2021.

There was no REO acquired in the settlement of loans in both fiscal 2022 and fiscal 2021.

The balance of multi-family, commercial real estate, construction and commercial business loans, net of undisbursed loan funds, decreased 4% to $559.5 million at June 30, 2022 from $583.6 million at June 30, 2021, and represented 60% and 68% of loans held for investment, respectively.

The balance of single-family loans held for investment decreased $30.5 million, or 10%, to $268.3 million at June 30, 2021, from $298.8 million at June 30, 2020.

The balance of single-family loans held for investment increased $109.9 million, or 41%, to $378.2 million at June 30, 2022, from $268.3

million at June 30, 2021.

For additional information on loans held for investment, see Note 3 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

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As of June 30, 2022 and 2021, the percentage of transaction accounts to total deposits was 87% and 85%, respectively.

Non-interest bearing deposits as a percentage of total deposits decreased slightly to 13.1% at June 30, 2021 from 13.3% at June 30, 2020.

Non interest-bearing deposits as a percentage of total deposits remained unchanged at 13% on June 30, 2022 as compared to June 30, 2021.

The change in deposit mix was consistent with the Corporation’s marketing strategy to promote transaction accounts and the strategic decision to increase the percentage of lower cost checking and savings accounts in its deposit base and decrease the percentage of time deposits by competing less aggressively for time deposits.

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Borrowings, consisting of FHLB – San Francisco advances decreased $16.0 million, or 16%, to $85.0 million at June 30, 2022 from $101.0 million at June 30, 2021.

The decrease was due to scheduled maturities and prepayments of advances during fiscal 2021.

The decrease was due to scheduled maturities and prepayments of advances during fiscal 2022, partly offset by a new $5.0 million overnight advance on June 30, 2022.

The weighted-average maturity of the Corporation’s FHLB – San Francisco advances was approximately 16 months at June 30, 2022, down from 24 months at June 30, 2021.

For additional information on borrowings, see Note 7 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

Total stockholders’ equity increased $3.3 million or 3% to $127.3 million at June 30, 2021 from $124.0 million at June 30, 2020, primarily as a result of net income and the amortization of stock-based compensation benefits in fiscal 2021, partly offset by stock repurchases (see Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” of this Form 10-K) and quarterly cash dividends paid to shareholders.

Total stockholders’ equity increased $1.4 million or 1% to $128.7 million at June 30, 2022 from $127.3 million at June 30, 2021, primarily as a result of net income and the amortization of stock-based compensation benefits in fiscal 2022, partly offset by stock repurchases (see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Form 10-K) and quarterly cash dividends paid to shareholders.

Comparison of Operating Results for the Years Ended June 30, 2022 and 2021

The Corporation recorded net income of $7.6 million, or $1.00 per diluted share, for the fiscal year ended June 30, 2021, down $128,000, or 2%, from $7.7 million, or $1.01 per per diluted share, for the fiscal year ended June 30, 2020.

The decrease in net income in fiscal 2021 was primarily attributable to a $5.8 million decrease in net interest income, partly offset by a $3.2 million decrease in non-interest expense and a $1.8 million improvement in the provision for loan losses resulting in a recovery of $708,000 from the allowance for loan losses in fiscal 2021.

The Corporation's efficiency ratio, defined as non-interest expense divided by the sum of net interest income and non-interest income, increased slightly to 73% in fiscal 2021 from 71% in fiscal 2020.

Return on average assets in fiscal 2021 decreased to 0.64% from 0.69% in fiscal 2020 and return on average stockholders' equity in fiscal 2021 decreased to 6.05% from 6.26% in fiscal 2020.

The Corporation recorded net income of $9.1 million, or $1.22 per diluted share, for the fiscal year ended June 30, 2022, up $1.5 million, or 20%, from $7.6 million, or $1.00 per per diluted share, for the fiscal year ended June 30, 2021.

The increase in net income in fiscal 2022 compared to fiscal 2021 was primarily attributable to a $956,000 increase in net interest income and a $1.8 million increase in the recovery from the allowance for loan losses.

The Corporation's efficiency ratio, defined as non-interest expense divided by the sum of net interest income and non-interest income, improved to 71% in fiscal 2022 from 73% in fiscal 2021.

Return on average assets in fiscal 2022 increased to 0.76% from 0.64% in fiscal 2021 and return on average stockholders' equity in fiscal 2022 increased to 7.14% from 6.05% in fiscal 2021.

Net Interest Income.

Net interest income decreased $5.8 million, or 16%, to $30.6 million in fiscal 2021 from $36.4 million in fiscal 2020.

This decrease resulted from a decrease in the net interest margin, partly offset by an increase in the average balance of interest-earning assets.

The net interest margin decreased 70 basis points to 2.66% in fiscal 2021 from 3.36% in fiscal 2020, due to an 86 basis point decrease in the average yield on interest-earning assets, partially offset by an 18 basis points decrease in the average cost of interest-bearing liabilities.

Net interest income increased $956,000, or 3%, to $31.6 million in fiscal 2022 from $30.6 million in fiscal 2021.

This increase resulted from an increase in the net interest margin and, to a lesser extent, an increase in the average balance of interest-earning assets.

The net interest margin increased six basis points to 2.72% in fiscal 2022 from 2.66% in fiscal 2021, due primarily to a 14 basis points decrease in the average cost of interest-bearing liabilities, partly offset by a six basis points decrease in the average yield on interest-earning assets.

The average balance of interest-earning assets increased $8.2 million, or 1%, to $1.16 billion in fiscal 2022 from $1.15 billion in fiscal 2021.

The average balance of interest-bearing liabilities increased $67.9 million or 7% to $1.04 billion during fiscal 2021 as compared to $972.0 million during fiscal 2020.

The average balance of interest-bearing liabilities increased $8.4 million or 1% to $1.05 billion during fiscal 2022 as compared to $1.04 billion during fiscal 2021.

Interest Income.

Total interest income decreased $7.3 million, or 17%, to $35.2 million for fiscal 2021 from $42.5 million for fiscal 2020.

The decrease was primarily attributable to decreases in interest income on loans receivable and interest-earning deposits.

Interest income on loans receivable decreased $6.3 million, or 16%, to $32.8 million in fiscal 2021 from $39.1 million in fiscal 2020.

This decrease was attributable to both a lower average loan yield and a lower average loan balance.

The weighted average loan yield during fiscal 2021 decreased 48 basis points to 3.80% from 4.28% in fiscal 2020, due primarily to the decrease in market interest rates resulting from the decline in the general economic conditions impacted by the COVID-19 pandemic.

The average balance of loans receivable decreased $51.9 million, or 6%, to $863.5 million during fiscal 2021 from $915.4 million during fiscal 2020.

Interest income from investment securities decreased $271,000, or 13%, to $1.8 million in fiscal 2021 from $2.1 million in fiscal 2020.

This decrease was primarily a result of a decrease in the average yield, partly offset by an increase in the average balance.

The average yield on investment securities decreased 154 basis points to 0.90% during fiscal 2021 from 2.44% during fiscal 2020.

The decrease in the average yield of investment securities was primarily attributable to purchases of new investment securities during fiscal 2021 with a lower average yield than the existing portfolio, repricings of adjustable rate mortgage-backed securities to a lower yield and a higher premium amortization resulting from higher principal payments.

Total interest income decreased $471,000, or 1%, to $34.7 million for fiscal 2022 from $35.2 million for fiscal 2021.

The decrease was primarily attributable to a decrease in interest income on loans receivable, partly offset by an increase in interest income on investment securities, FHLB – San Francisco stock and interest-earning deposits.

Interest income on loans receivable decreased $695,000, or 2%, to $32.2 million in fiscal 2022 from $32.9 million in fiscal 2021.

This decrease was attributable to a lower average loan yield, partly offset by a higher average loan balance.

The weighted average loan yield during fiscal 2022 decreased 10 basis points to 3.70% from 3.80% in fiscal 2021, due primarily to the decrease in market interest rates resulting from the decline in the general economic conditions impacted by the

COVID-19 pandemic in the first half of fiscal 2022 with the reverse impact from the improved economic conditions in the second half of fiscal 2022.

The average balance of loans receivable increased $6.8 million, or 1%, to $870.3 million during fiscal 2022 from $863.5 million during fiscal 2021.

Interest income from investment securities increased $57,000, or 3%, to $1.9 million in fiscal 2022 from $1.8 million in fiscal 2021.

This increase was primarily a result of increases in both the average yield and the average balance.

The average yield on investment securities increased two basis points to 0.92% for fiscal 2022 from 0.90% for fiscal 2021.

The increase in the average yield of investment securities was primarily attributable to purchases of new investment securities during fiscal 2022 with a higher average yield than the existing portfolio, repricings of adjustable rate mortgage-backed securities to a higher yield and a lower premium amortization ($1.6 million compared to $2.0 million) resulting from lower principal payments.

The average balance of investment securities increased $1.3 million, or 1%, to $206.9 million in fiscal 2022 from $205.6 million in fiscal 2021 as a result of the new purchases of investment securities, partly offset by scheduled and accelerated principal payments on mortgage-backed securities.

During fiscal 2021, the Bank purchased $158.0 million of mortgage-backed securities with a weighted average yield of 0.82% and did not sell any investment securities.

During fiscal 2021, the Bank received $418,000 of cash dividends from its FHLB - San Francisco stock, a decrease of $116,000 or 22% from the $534,000 of cash dividends received in fiscal 2020.

The decrease in cash dividends was due primarily to a lower average yield on the FHLB-San Francisco stock held.

Interest income from interest-earning deposits, primarily cash deposited at the Federal Reserve Bank of San Francisco, decreased $579,000, or 88%, to $78,000 in fiscal 2021 from $657,000 in fiscal 2020, due to a lower average yield, partly offset by a higher average balance.

The average yield decreased 80 basis points to 0.10% in fiscal 2021 from 0.90% in fiscal 2020, resulting from decreases in the targeted federal funds interest rate.

The average balance of interest-earning deposits increased $3.2 million, or 4%, to $75.0 million in fiscal 2021 from $71.8 million in fiscal 2020.

During fiscal 2022, the Bank purchased $19.0 million of mortgage-backed securities and collateralized mortgage obligations with a weighted average yield of 1.34% and did not sell any investment securities.

During fiscal 2022, the Bank received $489,000 of cash dividends from its FHLB - San Francisco stock, an increase of $71,000 or 17% from the $418,000 of cash dividends received in fiscal 2021.

The increase in cash dividends was due primarily to a higher average yield (5.98% vs.

5.22%) and, to a lesser extent, a higher average balance of FHLB-San Francisco stock owned ($8.2 million vs.

$8.0 million).

Interest income from interest-earning deposits, primarily cash deposited at the Federal Reserve Bank of San Francisco, increased $96,000, or 123%, to $174,000 in fiscal 2022 from $78,000 in fiscal 2021, due to a higher average yield.

The average yield increased 13 basis points to 0.23% in fiscal 2022 from 0.10% in fiscal 2021, resulting from increases in the targeted federal funds interest rate in the second half of fiscal 2022.

Interest Expense.

Total interest expense for fiscal 2022 was $3.1 million as compared to $4.6 million for fiscal 2021, a decrease of $1.5 million, or 33%.

This decrease was primarily attributable to a lower interest expense on deposits,

particularly on time deposits and, to a lesser extent, a lower interest expense on borrowings.

The average cost of interest-bearing liabilities was 0.44% during fiscal 2021, down 18 basis point from 0.62% during fiscal 2020.

Interest expense on deposits for fiscal 2021 was $1.7 million as compared to $2.9 million for fiscal 2020, a decrease of $1.2 million, or 41%.

The decrease in interest expense on deposits was primarily attributable to a lower average cost, particularly for time deposits.

The average cost of deposits decreased 16 basis points to 0.19% in fiscal 2021 from 0.35% in fiscal 2020.

The average cost of transaction accounts was 0.06% in fiscal 2021, down eight basis points from 0.14% in fiscal 2020;

This decrease was primarily attributable to a lower interest expense on borrowings and, to a lesser extent, a lower interest expense on deposits, particularly on time deposits.

The average cost of interest-bearing liabilities was 0.30% during fiscal 2022, down 14 basis point from 0.44% during fiscal 2021, while the average balance of interest-bearing liabilities was $1.05 billion during fiscal 2022, up $8.4 million or 1% from $1.04 billion during fiscal 2021.

Interest expense on deposits for fiscal 2022 was $1.1 million as compared to $1.7 million for fiscal 2021, a decrease of $601,000, or 34%.

The decrease in interest expense on deposits was attributable to a lower average cost, particularly for time deposits, partly offset by an increase in average balance.

The average cost of deposits decreased seven basis points to 0.12% in fiscal 2022 from 0.19% in fiscal 2021.

The average cost of transaction accounts was 0.05% in fiscal 2022, down one basis point from 0.06% in fiscal 2021;

while the average cost of time deposits in fiscal 2022 was 0.57%, down 25 basis points, from 0.82% in fiscal 2021.

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Interest expense on borrowings, consisting of FHLB - San Francisco advances, for fiscal 2022 decreased $826,000, or 29%, to $2.0 million as compared to $2.8 million in fiscal 2021.

The decrease in interest expense on borrowings was due primarily to a lower average cost and, to a lesser extent, a lower average balance.

The average cost of borrowings decreased to 2.24% in fiscal 2021 from 2.43% in fiscal 2020, a decrease of 19 basis points.

The decrease in the average cost of borrowings was primarily due to scheduled maturies and prepayments of advances with a higher average cost in fiscal 2021, partly offset by prepayment fees.

During fiscal 2021, the Bank prepaid a total of $25.0 million in advances with total prepayment fees of $33,000.

The decrease in interest expense on borrowings was due primarily to a lower average balance, partly offset by a slightly higher average cost.

The average balance of borrowings decreased $38.7 million, or 31%, to $86.9 million during fiscal 2022 from $125.6 million during fiscal 2021.

The decrease in the average balance was due primarily to the maturities and prepayment of advances in fiscal 2022.

The average cost of borrowings was 2.29% in fiscal 2022, up five basis points from 2.24% in fiscal 2021.

The Bank prepaid a total of $10.0 million in advances with total prepayment fees of $39,000 in fiscal 2022, as compared to the prepayment of $25.0 million in advances with total prepayment fees of $33,000 in fiscal 2021.

Provision (Recovery) for Loan Losses.

During fiscal 2021, the Corporation recorded a recovery from the allowance for loan losses of $708,000, as compared to a $1.1 million provision for loan losses during fiscal 2020.

During fiscal 2022, the Corporation recorded a recovery from the allowance for loan losses of $2.5 million, as compared to a recovery from the allowance for loan losses of $708,000 during fiscal 2021.

The recovery from the allowance for loan losses in fiscal 2022 was primarily due to an improvement in the forecasted economic metrics utilized in the qualitative component adjustment to the allowance for loan losses reflecting improved general economic conditions and recoveries from the allowance for loan losses from non-performing loans and classified loans that were upgraded or paid off, partly offset by an increase in loans held for investment.

The recovery from the allowance for loan losses in fiscal 2021 was primarily due to an improvement in the forecasted economic metrics utilized in the qualitative component adjustment to the allowance for loan losses attributable to an improved economic outlook during the second half of fiscal 2021, reducing the expected impact of the COVID-19 pandemic to the credit quality of the loan portfolio, and a decrease in loans held for investment.

The provision for loan losses in fiscal 2020 was primarily due to a qualitative component established in the allowance for loan losses methodology in response to the COVID-19 pandemic and forecasted adverse economic impact.

The allowance for loan losses decreased $678,000, or 8%, to $7.6 million at June 30, 2021 from $8.3 million at June 30, 2020.

Non-performing assets (net of the collectively evaluated allowances and individually evaluated allowances), with underlying collateral primarily located in Southern California, increased $3.7 million or 76% to $8.6 million, or 0.73% of total assets, at June 30, 2021, compared to $4.9 million, or 0.42% of total assets, at June 30, 2020.

Non-performing loans at June 30, 2021 were $8.6 million, comprised of 27 single-family loans ($7.9 million) and one multi-family loan ($781,000).

There was no REO at both June 30, 2021 and 2020.

As of June 30, 2021, 89%, or $7.7 million of non-performing loans have a current payment status.

Non-performing assets, comprised soley of non-performing loans (net of the collectively evaluated allowances and individually evaluated allowances), with underlying collateral primarily located in Southern California, was $1.4 million at June 30, 2022, down $7.2 million or 84% from $8.6 million at June 30, 2021.

Non-performing loans at June 30, 2022 were $1.4 million, comprised of seven single-family loans.

As of June 30, 2022, all of the non-performing loans have a current payment status.

Net loan recoveries in fiscal 2022 were $439,000 or 0.05% of average loans receivable, compared to net loan recoveries of $30,000 or 0.00% of average loans receivable in fiscal 2021.

Classified assets at June 30, 2021 were $10.4 million, comprised of $1.8 million in the special mention category, $8.6 million in the substandard category and no outstanding REO.

Classified assets at June 30, 2020 were $14.1 million, comprised of $8.6 million in the special mention category, $5.5 million in the substandard category and no outstanding REO.

At both June 30, 2022 and June 30, 2021, there was no REO.

Management believes that, based on currently available information, the allowance for loan losses is sufficient to absorb potential losses inherent in loans held for investment at June 30, 2022 under the incurred loss methodology.

Classified assets, comprised soley of loans, were $1.6 million at June 30, 2022, comprised of $224,000 in the special mention category and $1.4 million in the substandard category.

Classified assets at June 30, 2021 were $10.4 million, comprised of $1.8 million in the special mention category and $8.6 million in the substandard category.

For additional information, see Item 1, “Business - “Delinquencies and Classified Assets” in this Form 10-K.

For the fiscal year ended June 30, 2021, there were 20 loans that were newly modified from their original terms (including 19 COVID-19 related forbearance loans downgraded when their monthly payment deferrals were extended beyond six months), re-underwritten or identified as a restructured loan;

For the fiscal year ended June 30, 2022, there were no loans that were newly modified from their original terms, re-underwritten or identified as a restructured loan;

three loans were upgraded to the pass category;

seven loans were paid off;

and no loans were converted to real estate owned.

two loans were upgraded to the pass category;

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and no loans were converted to real estate owned.

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;

were converted to real estate owned.

The outstanding balance of restructured loans at June 30, 2021 was $7.9 million (23 loans), up 204% from $2.6 million (eight loans) at June 30, 2020.

As of June 30, 2021, all restructured loans were classified as substandard on non-accrual status, except three loans totaling $876,000.

As of June 30, 2021, 97%, or $7.7 million of the restructured loans have a current payment status, consistent with their modified payment terms.

The outstanding balance of restructured loans at June 30, 2022 was $4.5 million (13 loans), down 43% from $7.9 million (23 loans) at June 30, 2021.

As of June 30, 2022, one restructured loan of $722,000 was in non-accrual status.

As of June 30, 2022, all of the restructured loans have a current payment status, consistent with their modified payment terms.

During fiscal 2022, no restructured loans were in default within a 12-month period subsequent to their original restructuring.

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Management believes that the amount maintained in the allowance will be adequate to absorb probable losses inherent in the loans held for investment.

Although management believes it uses the best information available to make such determinations, there can be no assurance that regulators, in reviewing the Bank's loans held for investment, will not request the Bank to significantly increase its allowance for loan losses.

Although management believes it uses the best information available to make such determinations, there can be no assurance that regulators, in reviewing the Bank's

loans held for investment, will not request the Bank 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 control of the Bank, including as a result of the COVID-19 pandemic.

Non-Interest Income.

Total non-interest income increased $53,000, or 1%, to $4.6 million in fiscal 2021 from $4.5 million in fiscal 2020.

The slight increase was primarily attributable to increases in loan servicing and other fees as well as in card and processing fees, partly offset by a decrease in deposit account fees.

Loan servicing and other fees increased $351,000, or 43%, to $1.2 million for fiscal 2021 from $819,000 in fiscal 2020.

The increase was due primarily to higher loan prepayment fees, resuting from a higher loan payoffs, particularly in multi-family loans.

Card and processing fees increased $151,000, or 10%, to $1.6 million in fiscal 2021 from $1.5 million in fiscal 2020, primarily attributable to a higher transaction volume.

Deposit account fees decreased $363,000, or 23%, to $1.2 million for fiscal 2021 from $1.6 million in fiscal 2020, due primarily to certain fees that were waived related to accounts impacted by the COVID-19 pandemic and reduced transactions reflecting changes in spending habits due to the COVID-19 pandemic.

Total non-interest income was $4.7 million in fiscal 2022, an increase of $143,000 or 3% from $4.6 million in fiscal 2021.

The increase was primarily attributable to an increase in other non-interest income as well as in deposit account fees, partly offset by the decrease in loan servicing and other fees.

Loan servicing and other fees decreased $114,000, or 10%, to $1.1 million for fiscal 2022 from $1.2 million in fiscal 2021.

The decrease was due primarily to a fair value adjustment of loans held at fair value, partly offset by a higher mortgage servicing asset valuation.

Other non-interest income increased $168,000, or 30%, to $719,000 in fiscal 2022 from $551,000 in fiscal 2021.

The increase was due primarily to a $40,000 recovery from the recourse reserve for sold loans in fiscal 2022 as compared to a $105,000 provision for losses on sold loans in fiscal 2021.

Non-Interest Expense.

Total non-interest expense in fiscal 2021 was $25.7 million, a decrease of $3.2 million, or 11%, as compared to $28.9 million in fiscal 2020.

The decrease in non-interest expense was primarily attributable to a decrease in salaries and employee benefits expense, partly offset by an increase in deposit insurance premiums and regulatory assessments expense.

Salaries and employee benefits expense decreased $3.7 million, or 20%, to $15.2 million in fiscal 2021 from $18.9 million in fiscal 2020.

The decrease in salaries and employee benefits was primarily due to a $2.4 million credit from the Employee Retention Tax Credit (“ERTC”), fewer number of employees, a decrease in incentive based compensation expense and a decrease in group insurance expenses, partly offset by an increase in stock-based compensation expense.

Total non-interest expense in fiscal 2022 was $25.9 million, an increase of $182,000 or 1% from $25.7 million in fiscal 2021.

The increase in non-interest expense was primarily attributable to increases in salaries and employee benefits and equipment expense, partly offset by decreases in premises and occupancy expense, professional expense and other non-interest expenses.

Salaries and employee benefits expense increased $676,000, or 4%, to $15.8 million in fiscal 2022 from $15.2 million in fiscal 2021.

The increase in salaries and employee benefits expense was primarily due to a lower credit from the Employee Retention Tax Credit (“ERTC”), partly offset by decreases in equity incentive compensation expense and retirement benefit expense.

The ERTC credit was recorded for qualified wages consistent with the criteria outlined within the CAA and American Rescue Plan Act of 2021 where eligible employers can claim a maximum credit equal to 70 percent of $10,000 of qualified wages paid to an employee per calendar quarter for the year 2021.

Deposit insurance premiums and regulatory assessments expense increased $325,000, or 143%, to $552,000 in fiscal 2021 from $227,000 in fiscal 2020.

The increase was due primarily to FDIC insurance premium credits applied in fiscal 2020, which were not replicated in fiscal 2021.

The Bank recorded a $1.2 million ERTC credit in fiscal 2022, down $1.2 million or 50% from $2.4 million in fiscal 2021.

The Bank recorded $798,000 of stock-based compensation expense in fiscal 2022, down $505,000 or 39% from $1.3 million in fiscal 2021, primarily due to adjustments upon vesting of prior restricted stock grants.

The Bank also recorded a $217,000 accrual for the retirement benefit expense in fiscal 2022, down $346,000 or 61% from $563,000 in fiscal 2021.

Equipment expense increased $129,000 or 11% to $1.3 million in fiscal 2022 from $1.2 million in fiscal 2021.

The increase was primarily due to a higher maintenance of software license costs resulting from additional software implementations and increases in software renewal costs in fiscal 2022.

Premises and occupancy expense decreased $311,000, or 9%, to $3.2 million in fiscal 2022 from $3.5 million in fiscal 2021.

The decrease was due primarily to a lower network services expense, including a refund of $136,000 from a vendor on previously paid network services invoices that were overstated when billed.

Professional expenses decreased $142,000, or 9%, to $1.4 million in fiscal 2022 from $1.6 million in fiscal 2021.

The decrease was due primarily to lower legal expenses as litigation was settled in fiscal 2021.

Other non-interest expenses decreased $123,000, or 4%, to $3.0 million in fiscal 2022 from $3.1 million in fiscal 2021.

The decrease was due primarily to a litigation settlement of $145,000 in fiscal 2021, not replicated in fiscal 2022.

Provision for Income Taxes.

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The provision for income taxes was $3.8 million for fiscal 2022, representing an effective tax rate of 29.3%, as compared to $2.6 million in fiscal 2021, representing an effective tax rate of 25.8%.

The lower effective tax rate in fiscal 2021 was attributable to the tax benefits from the exercise of stock options and the non-taxable treatment of the ERTC for state tax purposes.

The higher provision for income taxes in fiscal 2022 in comparison to fiscal 2021 was due primarily to a higher net income before provision for income taxes, while the higher effective tax rate in fiscal 2022 was attributable to no tax benefits from the exercise of stock options and the non-taxable treatment of the lower ERTC for state tax purposes in fiscal 2022 as compared to fiscal 2021.

The Corporation’s effective tax rate may differ from the estimated 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.

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Investment securities

FHLB – San Francisco

FHLB – San Francisco stock

Interest-earning deposits

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Interest-bearing liabilities:

Checking and money

market accounts (2)

Checking and money market accounts (2)

Savings accounts

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Total deposits (3)

Total interest-bearing

Non interest-bearing

Total interest-bearing liabilities

Non interest-bearing liabilities

Total liabilities

Stockholders’ equity

Total liabilities and

stockholders’ equity

Total liabilities and stockholders’ equity

Net interest income

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Net interest margin (5)

Ratio of average interest-

earning assets to average

interest-bearing liabilities

(1) Includes loans held for sale and non-performing loans, as well as net deferred loan costs of $2.5 million, $1.1 million and $1.2 million for the years ended June 30, 2021, 2020 and 2019, respectively.

Ratio of average interest- earning assets to average interest-bearing liabilities

(1) Includes non-performing loans, as well as net deferred loan costs of $1.8 million, $2.5 million and $1.1 million for the years ended June 30, 2022, 2021 and 2020, respectively.

(2) Includes the average balance of non interest-bearing checking accounts of $119.5 million, $116.1 million and $90.0 million in the years ended June 30, 2022, 2021 and 2020, respectively.

(3) Includes the average balance of uninsured deposits of $169.2 million, $152.9 million and $122.3 million in the years ended June 30, 2022, 2021 and 2020, respectively.

(4) Represents the difference between the weighted-average yield on all interest-earning assets and the weighted-average rate on all interest-bearing liabilities.

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On June 30, 2022, time deposits that are scheduled to mature in one year or less were $78.6 million.

Historically, the Bank has been able to retain a significant percentage of its time deposits as they mature by adjusting deposit rates to the current interest rate environment.

Historically, the Bank has been able to retain a significant percentage of its time deposits as they mature by adjusting deposit rates based upon the current interest rate environment.

The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities.

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Regulations require the Bank to maintain adequate liquidity to assure safe and sound operations.

The Bank's average liquidity ratio (defined as the ratio of average qualifying liquid assets to average deposits and borrowings) for the quarter ended June 30, 2021 increased to 32.0% from 23.1% during the same quarter ended June 30, 2020.

The increase in the liquidity ratio was due primarily to the increase in average qualifying liquid assets, partly offset by the smaller increase in average deposits and borrowings during the quarter ended June 30, 2021 in comparison to the quarter ended June 30, 2020.

The Bank's average liquidity ratio (defined as the ratio of average qualifying liquid assets to average deposits and borrowings) for the quarter ended June 30, 2022 decreased to 24.3% from 32.0% during the same quarter ended June 30, 2021.

The decrease in the liquidity ratio was due primarily to the decrease in average qualifying liquid assets and the increase in average deposits and borrowings during the quarter ended June 30, 2022 in comparison to the quarter ended June 30, 2021.

The Bank augments its liquidity by maintaining sufficient borrowing capacity at the FHLB - San Francisco, Federal Reserve Bank of San Francisco and its correspondent bank.

We incur capital expenditures on an ongoing basis to expand and improve our product offerings, enhance and modernize our technology infrastructure, and to introduce new technology-based products to compete effectively in our markets.

We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment.

The amount of capital investment is influenced by, among other things, current and projected demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations.

Based on our current capital allocation objectives, during fiscal 2023 we project expending approximately $989,000 to $1.9 million of cash for capital investment in property, plant and equipment.

In addition, we currently expect to continue our current practice of paying quarterly cash dividends on our common stock subject to our Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice.

Our current quarterly common stock dividend rate is $0.14 per share, as approved by our Board of Directors, which we believe is a dividend rate per share

which enables us to balance our multiple objectives of managing and investing in the Bank, and returning a substantial portion of our cash to our shareholders.

The Bank, as a federally-chartered, federally insured savings bank, is subject to the capital requirements established by the OCC.

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At June 30, 2022, the Bank exceeded all regulatory capital requirements.

Under the prompt corrective action provisions, minimum ratios of 5.0% for Tier 1 Leverage Capital, 6.5% for Common Equity Tier 1 ("CET1") Capital, 8.0% for Tier 1 Capital and 10.0% for Total Capital are required to be deemed “well capitalized.” As of June 30, 2021, the Bank exceeded

the capital ratios needed to be considered well capitalized with Tier 1 Leverage Capital, CET1 Capital, Tier 1 Capital and Total Capital ratios of 10.2%, 18.6%, 18.6% and 19.8%, respectively.

Impact of Inflation and Changing Prices

The Corporation's consolidated financial statements are prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time as a result of inflation.

The impact of inflation is reflected in the increasing cost of the Corporation's operations.

Unlike most industrial companies, nearly all assets and liabilities of the Corporation are monetary.

As a result, interest rates have a greater impact on the Corporation's performance than do the effects of general levels of inflation.

In addition, interest rates do not necessarily move in the direction, or to the same extent, as the prices of goods and services.

Under the prompt corrective action provisions, minimum ratios of 5.0% for Tier 1 Leverage Capital, 6.5% for CET1 Capital, 8.0% for Tier 1 Risk-based Capital and 10.0% for Total Risk-based Capital are required to be deemed “well capitalized.” As of June 30, 2022, the Bank exceeded the capital ratios needed to be considered well capitalized with Tier 1 Leverage Capital, CET1 Capital, Tier 1 Risk-based Capital and Total Risk-based Capital ratios of 10.5%, 19.6%, 19.6% and 20.5%, respectively.

Impact of New Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis