What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2022-09-02 compared with 2021-09-03 · 223 added, 306 removed, 1448 unchanged (27% of the section changed)

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Not applicable.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Not Applicable.

Directors, Executive Officers and Corporate Governance

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Barr, Audit Committee Chairman, as its audit committee financial expert.

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.

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 (inactive) and has been practicing public accounting for over 46 years.

Nominating Procedures

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The cover page from this Annual Report on Form 10-K for the quarter ended June 30, 2022, formatted in Inline XBRL and contained in Exhibit 101

Form 10-K Summary.

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.

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September 2, 2022

/s/ William E.

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Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID No.

Consolidated Statements of Financial Condition as of June 30, 2022 and 2021

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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, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2021, in conformity with accounting principles generally accepted in the United States of America.

We have audited the accompanying consolidated statements of financial condition of Provident Financial Holdings and subsidiary (the “Corporation”) as of June 30, 2022 and 2021, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows, for each of the three years in the period ended June 30, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2022, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

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Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

The critical audit matter communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Loans Held for Investment - Allowance for Loan Losses — Refer to Notes 1 and 3 to the financial statements

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Auditing the collectively evaluated loans of the Corporation’s ALL, specifically management’s qualitative loss factors for certain single-family, multi-family and commercial real estate loans, involved especially significant judgment.

significant judgements in determining these qualitative loss factors, performing procedures to evaluate the reasonableness of management’s estimates for these qualitative loss factors involved a high degree of auditor judgment and an increased extent of effort.

Given the significant judgments in determining these qualitative loss factors, performing procedures to evaluate the reasonableness of management’s estimates for these qualitative loss factors involved a high degree of auditor judgment and an increased extent of effort.

How the Critical Audit Matter Was Addressed in the Audit

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● We compared the Corporation’s loan loss factors, with benchmark data obtained independently to assess whether the ALL is within a reasonable range for specific loan categories.

● We evaluated the Company’s historical allowance estimation process by comparing the ALL recorded in historical periods to actual results.

● We evaluated the Corporation's historical allowance estimation process by comparing the ALL recorded in historical periods to actual results.

/s/ Deloitte & Touche LLP

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includes $ 1,396 and $ 1,874 of loans held at fair value, respectively;

$ 570.4 million and $ 607.0 million pledged to FHLB - San Francisco, respectively

Accrued interest receivable

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Net interest income

(Recovery) provision for loan losses

Net interest income, after (recovery) provision for loan losses

Recovery from the allowance for loan losses

Net interest income, after recovery from the the allowance for loan losses

Non-interest income:

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Diluted earnings per share

Cash dividends per share

(1) Includes a $ 2.4 million credit from the Employee Retention Tax Credit (applicable to eligible employers who retained employees during the COVID-19 pandemic) for the fiscal year ended June 30, 2021.

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

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Consolidated Statements of Stockholders’ Equity

Compre-hensive

Comprehensive

Income (Loss),

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Purchase of treasury stock (1)

Distribution of restricted stock

Forfeiture of restricted stock

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Distribution of restricted stock

Awards for restricted stock

Forfeiture of restricted stock

Amortization of restricted stock

Exercise of stock options

Stock options expense

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Balance at June 30, 2022

(1) Includes the purchase of 34,614 shares of distributed restricted stock in fiscal 2021 in settlement of employees' withholding tax obligations.

(1) Includes the purchase of 0 shares and 34,614 shares of distributed restricted stock in fiscal 2022 and 2021 in settlement of employees' withholding tax obligations, respectively.

(2) Cash dividends of $ 0.56 per share were paid in both fiscal 2022 and 2021.

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Depreciation and amortization

(Recovery) provision from loan losses

Recovery from the allowance for loan losses

Stock-based compensation

Provision for deferred income taxes

Decrease in accounts payable, accrued interest and other liabilities

Increase (decrease) in accounts payable, accrued interest and other liabilities

Increase in prepaid expenses and other assets

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Cash flows from investing activities:

Decrease (increase) in loans held for investment, net

(Increase) decrease in loans held for investment, net

Purchase of investment securities - held to maturity

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Purchase of FHLB - San Francisco stock

Proceeds from redemption of FHLB – San Francisco stock

Purchase of premises and equipment

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Increase in deposits, net

Proceeds from long-term borrowings

Repayments of long-term borrowings

(Repayment of) proceeds from short-term borrowings, net

Proceeds from (repayment of) short-term borrowings, net

Treasury stock purchases

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Cash dividends

Net cash (used for) provided by financing activities

Net (decrease) increase in cash and cash equivalents

Net cash used for financing activities

Net decrease in cash and cash equivalents

Cash and cash equivalents at beginning of year

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Cash paid for income taxes

Transfer of loans held for sale to held for investment

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

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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.

The Bank's activities include attracting deposits, offering banking services and originating and purchasing single-family, multi-family, commercial real estate, construction and other mortgage loans and, to a lesser extent, commercial business and consumer loans held for investment.

Deposits are collected primarily from 13 banking locations located in Riverside and San Bernardino counties in California.

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Loans held for investment

Loans held for investment consist of long-term adjustable and fixed 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 68 % and 66 % of total loans held for investment at June 30, 2021 and 2020, respectively.

Loans held for investment consist of long-term adjustable and fixed rate loans secured by first trust deeds on single-family residences and multi-family and commercial real estate loans secured by commercial property, land and other residential properties.

These loans are generally offered to customers and businesses located in California.

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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;

(i) Accounting Standards Codification (“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.

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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 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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Loans in forbearance

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act for 2020, as amended (“CARES Act”) was signed into law and on April 7, 2020, the Board of Governors of the Federal Reserve System “Federal Reserve”), Federal Deposit Insurance Corporation (“FDIC”), National Credit Union Administration, Office of the Comptroller of the

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act for 2020, as amended (“CARES Act”) was signed into law and on April 7, 2020, the Board of Governors of the Federal Reserve System (“Federal Reserve”), Federal Deposit Insurance Corporation (“FDIC”), National Credit Union Administration, Office of the Comptroller of the Currency (“OCC “) and Consumer Financial Protection Bureau issued the Interagency Statement on Loan Modifications

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

Currency (“OCC “) and Consumer Financial Protection Bureau issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus ("Interagency Statement").

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 pandemic are separately monitored and any request for continuation of relief beyond the initial modification were reassessed to determine if a further modification should be granted and if a downgrade in risk rating is appropriate.

After the payment deferral period (forbearance period), normal loan payments will once again become due and payable.

For commercial and consumer customers, the Corporation provided relief options, including payment deferrals and fee waivers.

All loans modified due to COVID-19 pandemic were separately monitored and any request for continuation of relief beyond the initial modification were reassessed to determine if a further modification should be granted and if a downgrade in risk rating was appropriate.

After the payment deferral period (forbearance period), normal loan payments once again became 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.

As of March 31, 2021, the Corporation ceased accepting new forbearance requests and as of June 30, 2022, the Corporation had no pending requests for this type of payment relief.

As of June 30, 2021, the Corporation had four forbearance loans with a total outstanding balance of $ 1.8 million or 0.22 percent of total loans that were modified and operating under forbearance agreements in accordance with the CARES Act and Interagency Statement.

As of June 30, 2022, the Corporation had no forbearance loans that were modified and operating under forbearance agreements in accordance with the CARES Act and Interagency Statement.

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

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All 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.

The Corporation typically upgrades restructured 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.

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interest and unrealized gains, among other items.

The decrease in the net deferred tax asset resulted primarily from a decreases in loan loss reserves and deferred compensation.

The decrease in the net deferred tax asset resulted primarily from a decreases in loan loss reserves and deferred loan costs.

The Corporation did not have any liabilities for uncertain tax positions or any known unrecognized tax benefit at June 30, 2022 or 2021.

Bank owned life insurance ("BOLI")

ASC 715-60-35, "Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,"

ASC 715-60-35, "Accounting for Deferred Compensation and Post-retirement 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.

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Stock repurchases

The Corporation repurchases its common stock consistent with Board-approved stock repurchase plans.

During fiscal 2021, a total of 104,982 shares of common stock were purchased at an average cost of $ 16.67 per share.

As of June 30, 2021, a total of 266,833 shares remain available for future repurchase pursuant to the Corporation's April 2020 stock repurchase plan.

The Corporation repurchased 257,285 shares of its common stock with an average cost of $ 16.73 per share during fiscal 2022 pursuant to its April 2020 stock repurchase plan that expired on April 27, 2022.

The Board of Directors approved a new stock repurchase plan on April 28, 2022 which authorized 364,259 shares for repurchase and expires on April 28, 2023, all of which remain available for purchase at June 30, 2022.

Earnings per common share (“EPS”)

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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 compensation expense, inclusive of restricted stock expense, recognized in the consolidated statements of operations for the years ended June 30, 2021 and 2020 was $ 1.3 million and $ 954,000 , respectively.

ASC 718, “Compensation – Stock Compensation,” requires companies to recognize in the Consolidated Statements of Operations the grant-date fair value of stock options and other equity-based compensation issued to employees and directors.

Stock-based compensation expense, inclusive of restricted stock expense, recognized in the Consolidated Statements of Operations for the years ended June 30, 2022 and 2021 was $ 798,000 and $ 1.3 million, respectively.

Employee Stock Ownership Plan ("ESOP")

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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 $ 1.2 million and $ 873,000 of restricted stock expense was amortized during fiscal 2021 and 2020, respectively.

A total of $ 747,000 and $ 1.2 million of restricted stock expense was amortized during fiscal 2022 and 2021, respectively.

PROVIDENT FINANCIAL HOLDINGS, INC.

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Accounting standard updates (“ASU”)

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326):

In November 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-10, “Government Assistance (Topic 832):

Disclosures by Business Entities about Government Assistance,” This ASU requires the following annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy:

(1) Information about the nature of the transactions and the related accounting policy used to account for the transactions, (2) The line items on the balance sheet and income statement that are affected by the transactions, and the amounts applicable to each financial statement line item and (3) Significant terms and conditions of the transactions, including commitments and contingencies.

This ASU is effective for all entities within their scope for financial statements issued for annual periods beginning after December 15, 2021.

The Corporation has adopted this ASU and it did not have a material impact on the Corporation’s consolidated financial statements.

See Note 18 for additional disclosure.

In June 2016, the 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.

2018-19, April 2019, ASU 2019-04, May 2019, ASU 2019-05, November 2019, ASU 2019-11, February 2020, ASU 2020-02, March 2020, ASU 2020-03 and March 2022, ASU 2022-02, 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):

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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.

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 upon 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.

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This ASU applies to contracts, hedging relationships and other transactions that reference 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.

The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract re-

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

measurement or reassessment of a previous accounting determination.

In January 2021, ASU 2021-01 clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the changes in the interest rates used for margining, discounting, or contract price alignment for derivative instruments that are being implemented as part of the market-wide transition to new reference rates (commonly referred to as the “discounting transition”).

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.

Investment Securities

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government sponsored enterprise MBS (1)

government sponsored enterprise CMO (2)

SBA securities (3)

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(1) Mortgage-backed securities (“MBS”).

(2) Small Business Administration ("SBA").

(2) Collateralized Mortgage Obligations (“CMO”).

(3) Small Business Administration ("SBA").

June 30, 2021

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Total investment securities

In fiscal 2021 and 2020, the Corporation received MBS principal payments of $ 52.6 million and $ 32.1 million, respectively and did not sell any investment securities.

In fiscal 2022 and 2021, the Corporation received MBS principal payments of $ 55.3 million and $ 52.6 million, respectively and did no t sell any investment securities.

The Corporation purchased MBS totaling $ 19.0 million and $ 158.0 million during fiscal 2022 and 2021, respectively.

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Notes to Consolidated Financial Statements

As of June 30, 2021 and 2020, the Corporation held investments with an unrealized loss position of $ 810,000 and $ 69,000 , respectively.

As of June 30, 2022 and 2021, the Corporation held investments with an unrealized loss position of $ 14.1 million and $ 810,000 , respectively.

As of June 30, 2022

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government sponsored enterprise MBS

government sponsored enterprise CMO

Total investment securities - held to maturity

Available for sale

U.S government agency MBS

government sponsored enterprise MBS

Private issue CMO

Total investment securities - available for sale

Total investment securities

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government sponsored enterprise MBS

SBA securities

Total investment securities - held to maturity

Available for sale

Private issue CMO

Total investment securities - available for sale

Total investment securities

As of June 30, 2021, the Corporation had investment securities with unrealized holding losses of $ 810,000 that were less than 12 months and none that were in an unrealized loss position for more than 12 months, as compared to investment securities at June 30, 2020 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 of June 30, 2022, the Corporation had investment securities with unrealized holding losses of $ 9.2 million that were less than 12 months and $ 4.9 million that were in an unrealized loss position for more than 12 months, as compared to investment securities at June 30, 2021 with unrealized holding losses of $ 810,000 that were less than 12 months and none that were in an unrealized loss position for more than 12 months.

The unrealized loss at June 30, 2022 was primarily attributable to 39 U.S.

government sponsored enterprise MBS, two U.S.

government sponsored enterprise CMOs 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, 2021 was attributable to 16 U.S.

government sponsored enterprise MBS 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, 2020 was attributable to two U.S.

government agency 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 Corporation does not believe that there was any OTTI at June 30, 2022 and 2021.

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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 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;

For loans that were modified from their original terms, were re-underwritten and identified in the Corporation’s 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.

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Allowance for loan losses, end of period

Individually evaluated for impairment

Collectively evaluated for impairment

Individually evaluated for allowances

Collectively evaluated for allowances

Allowance for loan losses, end of period

Individually evaluated for impairment

Collectively evaluated for impairment

Individually evaluated for allowances

Collectively evaluated for allowances

Total loans held for investment, gross

Allowance for loan losses as a percentage of gross loans held for investment

Net (recoveries) charge-offs to average loans receivable, net during the period

Year Ended June 30, 2021

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Allowance for loan losses, end of period

Individually evaluated for impairment

Collectively evaluated for impairment

Individually evaluated for allowances

Collectively evaluated for allowances

Allowance for loan losses, end of period

Individually evaluated for impairment

Collectively evaluated for impairment

Individually evaluated for allowances

Collectively evaluated for allowances

Total loans held for investment, gross

Allowance for loan losses as a percentage of gross loans held for investment

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

Net (recoveries) charge-offs to average loans receivable, net during the period

The following summarizes the components of the net change in the allowance for loan losses for the years indicated:

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Balance, beginning of year

(Recovery) provision for loan losses

Recovery from the allowance for loan losses

Balance, end of year

The following tables identify the Corporation’s total recorded investment in non-performing loans by type at the dates and for the years 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.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

In addition, interest income is not recognized on any loan where management has determined that collection is not reasonably assured.

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Total multi-family loans

Commercial business loans:

With a related allowance

Total commercial business loans

Total non-performing loans

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(2) There was no related allowance for loan losses because these loans have been charged-off to their fair value or the fair value of the collateral is higher than the loan balance.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

At or For the Year Ended June 30, 2021

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Total single-family loans

Construction:

Without a related allowance (2)

Total construction loans

Multi-family:

With a related allowance

Total mutlti-family loans

Commercial business loans:

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At June 30, 2022 and 2021, there were no commitments to lend additional funds to those borrowers whose loans were classified as non-performing.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

During the fiscal years ended June 30, 2022 and 2021, the Corporation’s average investment in non-performing loans was $ 4.2 million and $ 9.1 million, respectively.

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The CARES Act and Interagency Statement provided guidance around the modification of loans as a result of the COVID-19 pandemic, and outlined, among other criteria, that short-term modifications of up to six months made on a good faith basis to borrowers who were current as defined under the CARES Act and Interagency Statement prior to any relief are not restructured loans and if all payments are current in accordance with the revised terms of the loan, the loan would not be reported as past due.

As of June 30, 2021, the Corporation had four forbearance loans with a total outstanding balance of $ 1.8 million, or 0.22 percent of total loans, that were modified and operating under forbearance agreements in accordance with the CARES Act and Interagency Statement.

As of June 30, 2022, the Corporation had no remaining forbearance loans that were modified and operating under forbearance agreements in accordance with the CARES Act and Interagency Statement.

As of June 30, 2022, loan forbearance related to COVID-19 hardship requests are described below:

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Total loan forbearance

(1) Includes 19 SFR loans totaling $ 7.1 million which were subsequently extended and classified as restructured non-performing loans.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

As of June 30, 2021, loan forbearance outstanding balances are described below:

Weighted Avg.

(Dollars In Thousands)

Single-family loans

Commercial real estate loans

Total loans in forbearance

(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.

(1) Includes 19 single-family loans totaling $ 6.9 million where forbearance was subsequently extended and were classified as restructured non-performing loans, consistent with the Interagency Statement.

As of June 30, 2022, five loans totaling $ 2.2 million were paid off and 13 loans totaling $ 3.9 million were upgraded to the pass category, while one loan totaling $ 760,000 remained as non-performing.

As of March 31, 2021, the Corporation ceased offering the COVID-19 forbearance relief program and as of June 30, 2022, the Corporation had no pending requests for this type of payment relief.

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 it is 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.

After the payment deferral period, normal loan payments once again became due and payable.

The forbearance amount is 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 following tables provide information on the past due status of the Corporation’s loans held for investment, gross, at the dates indicated.

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(1) All loans 90 days or greater past due are placed on non-accrual status.

For the fiscal year ended June 30, 2022, there were no loans that were newly modified from their original terms, reunderwritten 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.

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

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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;

and no loans were converted to real estate owned.

During the fiscal years ended June 30, 2022 and 2021, no restructured loans were in default within a 12-month period subsequent to their original restructuring.

Additionally, during the fiscal year ended June 30, 2021, there were 12 restructured loans totaling $ 4.7 million (which were all COVID-19 related forbearance loans prior to their restructuring) that were extended beyond the initial maturity of the modification;

while in fiscal 2020, there were no restructured loans that were extended beyond the initial maturity of the modification.

As of June 30, 2021, the net outstanding balance of the Corporation's 23 restructured loans was $ 7.9 million, all were classified as substandard on non-accrual status, except three loans totaling $ 876,000 .

As of June 30, 2021, $ 7.7 million, or 97 percent, of the restructured loans were current with respect to their payment status, consistent with their modified terms.

As of June 30, 2020, the net outstanding balance of the Corporation's eight restructured loans was $ 2.6 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).

Additionally, during the fiscal year ended June 30, 2022, there were no restructured loans that were extended beyond the initial maturity of the modification;

while in fiscal 2021, there were 12 restructured loans totaling $ 4.7 million (which were all COVID-19 related forbearance loans prior to their restructuring) that were extended beyond the initial maturity of the modification.

As of June 30, 2022, the net outstanding balance of the Corporation's 13 restructured loans was $ 4.5 million;

one loan with an outstanding balance of $ 722,000 was classified as substandard on non-accrual status.

As of June 30, 2022, all of the restructured loans were current with respect to their payment status, consistent with their modified terms.

As of June 30, 2021, the net outstanding balance of the Corporation's 23 restructured loans was $ 7.9 million;

20 loans totaling $ 7.0 million were classified as substandard on non-accrual status and three loans totaling $ 876,000 were classified as pass category on accrual status.

As of June 30, 2021, $ 7.7 million, or 97 percent, of the restructured loans were current with respect to their payment status, consistent with their modified terms.

5 unchanged sentences

Single-family

Commercial business loans

Restructured loans on accrual status:

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Total single-family

Commercial business loans:

With a related allowance

Total commercial business loans

Total restructured loans

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Balance, end of year

As of June 30, 2021 and 2020, all of the related-party loans were performing in accordance with their original contractual terms.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

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:

(In Thousands)

Loans serviced for Freddie Mac

Loans serviced for Fannie Mae

Loans serviced for FHLB – San Francisco

Total loans serviced for others

Mortgage servicing assets (“MSA”) are recorded when loans are sold to investors and the servicing of those loans is retained by the Bank.

The 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, 2021 and 2020, the Corporation held borrowers’ escrow balances related to loans serviced for others of $ 182,000 and $ 377,000 , respectively.

In estimating fair values of the MSA at June 30, 2021 and 2020, the Corporation used a weighted-average constant prepayment rate (“CPR”) of 21.82 % and 26.07 %, respectively, and a weighted-average discount rate of 9.10 % and 9.11 %, respectively.

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 $ 384,000 and a fair value of $ 208,000 at June 30, 2021.

This compares to the MSA at June 30, 2020 which had a carrying value of $ 673,000 and a fair value of $ 382,000 .

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, 2021, a total allowance of $ 176,000 was required for MSA, compared to a total allowance of $ 291,000 for MSA as of June 30, 2020.

Total additions to the MSA during the years ended June 30, 2021 and 2020 were $ 2,000 and $ 0 , respectively.

Total amortization of the MSA during the years ended June 30, 2021 and 2020 was $ 291,000 and $ 252,000 , respectively.

Loans sold to the FHLB – San Francisco were completed under its Mortgage Partnership Finance (“MPF”) program.

Under the MPF, 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, 2021, the Bank serviced $ 5.3 million of loans under this program and has established a recourse liability of $ 25,000 as compared to $ 7.4 million of loans serviced and a recourse liability of $ 70,000 at June 30, 2020.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

The following table summarizes the Corporation’s MSA for years ended June 30, 2021 and 2020:

Year Ended June 30,

(Dollars In Thousands)

MSA balance, beginning of fiscal year

MSA balance, end of fiscal year, before allowance

MSA balance, end of fiscal year

Fair value, beginning of fiscal year

Fair value, end of fiscal year

Allowance, beginning of fiscal year

Impairment recovery

Allowance, end of fiscal year

Key Assumptions:

Weighted-average discount rate

Weighted-average prepayment speed

The following table summarizes the estimated future amortization of MSA for the next five years and thereafter:

Year Ending June 30,

(In Thousands)

Total estimated amortization expense

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, 2021 and 2020.

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)

MSA net carrying value

CPR assumption (weighted-average)

Impact on fair value with 10% adverse change in prepayment speed

Impact on fair value with 20% adverse change in prepayment speed

Discount rate assumption (weighted-average)

Impact on fair value with 10% adverse change in discount rate

Impact on fair value with 20% adverse change in discount rate

As of June 30, 2022 and 2021, there were no outstanding related-party loans.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

During fiscal 2021, there was a $ 147,000 single-family loan sold, as compared to no loans sold in fiscal 2020;

and there were no outstanding loans held for sale at June 30, 2021 and June 30, 2020.

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.

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Checking deposits – interest-bearing (1)

0.00 % - 0.20 %

Savings deposits (1)

0.00 % - 0.70 %

Money market deposits (1)

0.00 % - 2.00 %

Time deposits:

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The Bank is required to maintain reserve balances with the Federal Reserve Bank of San Francisco.

Effective March 26, 2020, the Fedreal Reserve lowered the reserve ratios on transaction accounts maintained at a depository institution to zero percent so there was no required reserve balance at June 30, 2021 and 2020.

Effective March 26, 2020, the Federal Reserve lowered the reserve ratios on transaction accounts maintained at a depository institution to zero percent so there was no required reserve balance at June 30, 2022 and 2021.

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, 2022 and 2021 of $ 570.4 million and $ 607.0 million, respectively.

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In addition, as of June 30, 2022 and 2021, the Bank had a $ 153.9 million and $ 206.1 million discount window facility, respectively, at the Federal Reserve Bank of San Francisco, collateralized by investment securities with a fair market value of $ 163.7 million and $ 219.2 million, respectively.

As of June 30, 2021 and 2020, 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.

As of June 30, 2022 and 2021, the Bank also had a borrowing arrangement in the form of a federal funds facility with its correspondent bank for $ 50.0 million and $ 17.0 million, respectively.

The Bank intends to request a renewal of its borrowing arrangement with the correspondent bank prior to maturity.

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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, 2021 and 2020 were $ 16.0 million at both dates;

The outstanding letters of credit at June 30, 2022 and 2021 were $ 18.0 million and $ 16.0 million, respectively;

and the outstanding MPF credit enhancement was $ 2.5 million at both, June 30, 2022 and June 30, 2021.

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 $ 8.2 million with no excess capital stock at June 30, 2021.

This compares to a stock investment of $ 8.0 million with excess capital stock of $ 1.1 million at June 30, 2020.

During fiscal 2021, the FHLB – San Francisco did no t redeem any of the excess capital stock, while the Bank purchased $ 185,000 of FHLB - San Francisco capital stock.

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.

At both June 30, 2022 and 2021, the Bank held a stock investment of $ 8.2 million with no excess capital stock at either date.

During fiscal 2022, the FHLB – San Francisco did no t redeem any excess capital stock, while the Bank purchased $ 84,000 of FHLB - San Francisco capital stock.

During fiscal 2021, the FHLB – San Francisco did not redeem any excess capital stock, while the Bank purchased $ 185,000 of FHLB - San Francisco capital stock.

In fiscal 2022 and 2021, the FHLB – San Francisco distributed $ 489,000 and $ 418,000 of cash dividends, respectively, to the Bank.

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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, the Families First Coronavirus Response Act (the "Families First Act") was enacted.

Additionally, on March 27, 2020, the CARES Act was enacted.

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.

Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.

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.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

The provision for income taxes for the years indicated consisted of the following:

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Provision for income taxes

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

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 2022 and 2021 was $ 0 and $ 91,000 , respectively.

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Total net deferred tax assets

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

Net deferred tax assets at June 30, 2022 and 2021 were comprised of the following:

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Prepaid expenses

Unrealized gain on investment securities

Unrealized loss (gain) on investment securities

Unrealized gain on interest-only strips

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Net deferred tax assets

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

The net deferred tax assets were included in prepaid expenses and other assets in the Consolidated Statements of Financial Condition.

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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

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements.

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.

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If the Corporation was subject to regulatory guidelines for bank holding companies at June 30, 2022, it would have exceeded all regulatory capital requirements.

The Bank is subject to capital regulations which establish minimum required ratios for common equity Tier 1 capital (“CET1”), Tier1 and total capital require an additional capital conservation buffer over the required minimum capital ratios, and defines what qualifies as capital for purposes of meeting the capital requirements.

The Bank is subject to capital regulations which establish minimum required capital ratios for Tier 1 leverage, common equity Tier 1 (“CET1”), Tier 1 risk-based and total risk-based capital.

Additionally, a capital conservation buffer is required over the required minimum capital ratios, and capital regulations also defines what qualifies as capital for purposes of meeting the 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.

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, 2021, the capital conservation buffer of a minimum of 2.50% of risk weighted assets.

For calendar 2020 and thereafter, the minimum requirements call for a Tier1 leverage ratio of 4.00 %, a CET1 ratio 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 5.00 %, a CET1 capital ratio of 6.50 %, a Tier 1 capital ratio of 8.00 %, and a total capital ratio of 10.00 %.

In addition to the minimum capital ratios, the Bank has to maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% 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.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

For calendar 2020 and thereafter, the minimum requirements call for a Tier 1 leverage capital ratio of 4.00%, a CET1 capital ratio of 7.00%, a Tier 1 risk-based capital ratio of 8.50%, and a Total risk-based capital ratio of 10.50%.

Under the standards, in order to be considered well-capitalized, the Bank must have at minimum a Tier 1 leverage capital ratio of 5.00%, a CET1 capital ratio of 6.50%, a Tier 1 risk-based capital ratio of 8.00%, and a Total risk-based capital ratio of 10.00%.

The Bank’s actual and required minimum capital amounts and ratios at the dates indicated are as follows (dollars in thousands):

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(1) Inclusive of the conservation buffer of 2.50% for CET1 capital, Tier 1 capital and Total capital ratios.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

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

2 unchanged sentences

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.

The Corporation and 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.

1 unchanged sentence

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.

In addition, the Bank must file a prior written notice of a dividend with the Federal Reserve.

The Federal Reserve 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 2021 and 2020, the Bank declared $ 5.0 million and $ 7.5 million of cash dividends to its parent, the Corporation, respectively.

In fiscal 2022 and 2021, the Bank declared and paid $ 7.5 million and $ 5.0 million of cash dividends to its parent, the Corporation, respectively.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

Benefit Plans

3 unchanged sentences

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 $ 297,000 and $ 327,000 for the years ended June 30, 2021 and 2020, respectively.

The Corporation’s expense for the plan was approximately $ 297,000 for both the years ended June 30, 2022 and 2021.

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.

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The Corporation's contribution to the ESOP plan is discretionary.

During fiscal 2021, there were 40,000 shares that were purchased in the open market and no cash contributions to fulfill the annual discretionary allocation.

This compares to fiscal 2020 when the Corporation purchased 32,000 shares in the open market and no cash contributions to fulfill the annual discretionary allocation.

During fiscal 2022, there were 20,000 shares that were purchased in the open market and $ 317,000 in cash contributions to fulfill the annual discretionary allocation.

This compares to fiscal 2021 when the Corporation purchased 40,000 shares in the open market to fulfill the annual discretionary allocation.

Since the annual contributions are discretionary, the benefits payable under the ESOP cannot be estimated.

3 unchanged sentences

Benefits are payable upon death, retirement, early retirement, disability or separation from service.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

The net expense related to the ESOP for the years ended June 30, 2022 and 2021 was $ 659,000 and $ 577,000 respectively.

Available shares and cash contributions, if any, are allocated every calendar year end;

and the total allocated at December 31, 2020 and 2019 were 40,000 shares and no cash contributions at both dates.

and the total allocated at December 31, 2021 and 2020 were 40,000 shares at both dates.

Incentive Plans

As of June 30, 2022, 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, 2021 and 2020, the compensation cost for these plans was $ 1.3 million and $ 954,000 , respectively.

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”, collectively, the “Plans”).

For the years ended June 30, 2022 and 2021, the compensation cost for the Plans was $ 798,000 and $ 1.3 million, 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 Corporation established and the shareholders approved 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.

1 unchanged sentence

The 2010 Plan authorized 586,250 stock options and 288,750 shares of restricted stock.

No new awards can be granted from the 2010 and 2006 Plan.

The 2006 Plan authorized 365,000 stock options and 185,000 shares of restricted stock.

As of June 30, 2022, equity awards may be made only from the 2013 plan as no new equity awards can be granted from the 2010 and 2006 Plans.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

Equity Incentive Plans - Stock Options.

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Treasury note rate with a term similar to the underlying stock option on the particular grant date.

In fiscal 2021, there were no options granted under the Plans, while 132,000 options were exercised and 5,500 options were forfeited.

In fiscal 2020, there were no options granted under the Plans, while 16,250 options were exercised and no options were forfeited.

As of June 30, 2021 and 2020, there were 60,500 options and 57,500 options available for future grants under the Plans, respectively.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

Expected volatility

Weighted-average volatility

Expected dividend yield

Expected term (in years)

Risk-free interest rate

In fiscal 2022, there were 14,000 options granted and 3,000 options expired, while no options were exercised or forfeited .

In fiscal 2021, there were no options granted, while 132,000 options were exercised and 5,500 options were forfeited.

As of June 30, 2022 and 2021, there were 43,500 options and 60,500 options available for future grants under the 2013 Plan, respectively.

The following tables summarize the stock option activity in the Plans during the years ended June 30, 2022 and 2021:

9 unchanged sentences

The expense is expected to be recognized over a weighted-average period of 1.6 years and 1.9 years, respectively.

The forfeiture rate during both fiscal 2021 and 2020 was 20 percent, and was calculated by using the historical forfeiture experience of all fully vested stock option grants which is reviewed annually.

The forfeiture

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

rate during both fiscal 2022 and 2021 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.

3 unchanged sentences

The Corporation recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the award date.

In fiscal 2021, no shares of restricted stock were awarded under the Plans, while 112,750 shares were vested and distributed, and 11,500 shares were forfeited.

In fiscal 2020, no shares of restricted stock were awarded under the Plans and no shares were vested and distributed, while 8,000 shares were forfeited.

As of June 30, 2021 and 2020, there were 62,750 and 51,250 shares available for future awards under the Plans, respectively.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

In fiscal 2022, 1,000 shares of restricted stock were awarded, while 1,000 shares were vested and distributed, and 6,500 shares were forfeited.

In fiscal 2021, no shares of restricted stock were awarded and 112,750 shares were vested and distributed, while 11,500 shares were forfeited.

As of June 30, 2022 and 2021, there were 68,250 and 62,750 shares available for future awards under the 2013 Plan, respectively.

The following table summarizes the restricted stock activity for the years ended June 30, 2022 and 2021:

7 unchanged sentences

Expected to vest at June 30, 2022

As of June 30, 2021 and 2020, the unrecognized compensation expense was $ 1.8 million and $ 3.2 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.

As of June 30, 2022 and 2021, the unrecognized compensation expense was $ 994,000 and $ 1.8 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 0.9 years and 1.9 years, respectively.

Similar to stock options, a forfeiture rate of 20 percent has been applied to the restricted stock compensation expense calculations in fiscal 2021 and 2020.

For the fiscal years ended June 30, 2021 and 2020, the fair value of shares vested and distributed was $ 2.1 million and $ 0 , respectively.

Similar to stock options, a forfeiture rate of 20 percent was applied to the restricted stock compensation expense calculations in fiscal 2022 and 2021.

For the fiscal years ended June 30, 2022 and 2021, the fair value of shares vested and distributed was $ 17,000 and $ 2.1 million, respectively.

Earnings Per Share

3 unchanged sentences

As of June 30, 2022 and 2021, there were outstanding restricted stock awards of 94,750 shares and 101,250 shares, respectively.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

The following table provides the basic and diluted EPS computations for the fiscal years ended June 30, 2022 and 2021, respectively:

5 unchanged sentences

Restricted stock

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

For the Year Ended June 30, 2021

14 unchanged sentences

Total minimum payments required

For the years ended June 30, 2021 and 2020, the lease and operating commitment expense was approximately $ 1.7 million at both periods.

For the years ended June 30, 2022 and 2021, the lease and operating commitment expense was approximately $ 1.8 million and $ 1.7 million, respectively.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

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.

6 unchanged sentences

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

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

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.

15 unchanged sentences

Commitments to extend credit on loans to be held for investment

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

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, 2022 and 2021:

1 unchanged sentence

Balance, beginning of the year

Provision (recovery)

Balance, end of the year

3 unchanged sentences

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

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

required to report unrealized gains and losses on items in earnings for which the fair value option has been elected.

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.

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Valuation techniques include the use of pricing models, discounted cash flow models and similar techniques.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

ASC 820 requires the Corporation to maximize the use of observable inputs and minimize the use of unobservable inputs.

5 unchanged sentences

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.

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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

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

determined based on an observable market price or current appraised value of the underlying collateral.

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.

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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.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

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:

9 unchanged sentences

Total liabilities

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

Fair Value Measurement at June 30, 2021 Using:

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Ending balance at June 30, 2022

(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.

(1) The valuation of loans held for investment at fair value includes management’s estimate of the specific credit risk attributes of each loan, in addition to the quoted secondary-market prices which account for interest rate characteristics.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

Fair Value Measurement

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Ending balance at June 30, 2021

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

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:

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Mortgage servicing assets

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

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, 2022:

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Comparability adjustment

1.0 % - 1.8 % ( 1.7 %)

Loans held for investment, at

Loans held for investment, at fair value

Relative value analysis

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Default rates

5.0 % - 8.8 % ( 5.4 %)

Non-performing loans (4)

1 unchanged sentence

Credit risk factor

20.0 % - 30.0 % ( 28.3 %)

Mortgage servicing assets

Discounted cash flow

Prepayment speed (CPR)

Prepayment rate (CPR)

4.8 % - 60.0 % ( 10.9 %)

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Discounted cash flow

Prepayment speed (CPR)

Prepayment rate (CPR)

9.5 % - 32.0 % ( 30.6 %)

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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.

CMO offered quotes, prepayment rates 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, 2022, 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.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

various unobservable inputs used to determine valuations may have similar or diverging impacts on valuation.

For the fiscal year ended June 30, 2021, 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.

The carrying amount and fair value of the Corporation’s other financial instruments as of June 30, 2022 and 2021 were as follows:

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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.

SBA securities, U.S.

government sponsored enterprise MBS and U.S.

government sponsored enterprise CMOs.

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).

For the MBS, the U.S.

SBA securities and U.S.

government sponsored enterprise CMOs, the Corporation utilizes quoted prices in active markets for similar securities for its fair value measurement (Level 2).

FHLB – San Francisco stock:

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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

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.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

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.

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(1) Not in scope of ASC 606.

(2) Includes BOLI of $ 191 and $ 189 and net losses on sale of loans of $ 103 and $ 132 for the years ended June 30, 2021 and 2020, respectively, which are not in scope of ASC 606.

(2) Includes BOLI of $ 188 thousand and $ 191 thousand and net gain on sale of loans of $ 40 thousand and net loss on sale of loans of $ 103 thousand for the years ended June 30, 2022 and 2021, respectively, which are not in scope of ASC 606.

For the fiscal years ended June 30, 2022 and 2021, substantially all of the Corporation's revenues within the scope of ASC 606 are for performance obligations satisfied at a specified date.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

Revenues recognized in scope of ASC 606:

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These fees are recognized on a daily, monthly or quarterly basis, depending on the type of service.

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

Card and processing fees:

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Certain expenses directly associated with the debit cards are recorded on a net basis with the interchange income.

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.

Includes asset management 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.

Holding Company Condensed Financial Information

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Equity in undistributed earnings of the Bank

Increase in other assets

(Increase) decrease in other assets

Decrease in other liabilities

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Net cash used for financing activities

Net (decrease) increase in cash during the year

Net decrease in cash during the year

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Government Assistance

The Employee Retention Tax Credit (“ERTC”) was created as part of the CARES Act to encourage businesses to continue paying employees by providing a credit to the eligible employer for wages paid to eligible employees.

The refundable credit is available for wages paid from March 13, 2020 through September 30, 2021 and can be utilized even if companies received Paycheck Protection Program (“PPP”) loans.

For calendar year 2021, the maximum ERTC was $ 7,000 per eligible employee per quarter.

The 2021 credit was computed at a rate of 70 percent of qualified wages paid, up to $ 10,000 per eligible employee, per quarter.

For Eligible Employers with less than 500 average full-time employees in 2019 and experienced a decline in gross receipts in current quarter or prior quarter compared to the same quarter in calendar year 2019, the credit was available for all employees receiving wages in 2021.

The Corporation recognized an ERTC of $ 1.2 million in the first quarter of fiscal 2022 and $ 2.4 million in the fourth quarter of fiscal 2021.

The ERTC was recorded in the Consolidated Statement of Operations for the respective periods under Salaries and employee benefits expense as a reduction to the total expense and the receivables were recorded in the

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

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, 2021 and 2020:

Unrealized Gains and Losses on

Investment Securities

(Dollars In Thousands, Net of Statutory Taxes)

Available for Sale

Interest-Only Strips

Beginning balance at June 30, 2019

Other comprehensive loss before reclassifications

Amount reclassified from accumulated other comprehensive income

Net other comprehensive loss

Ending balance at June 30, 2020

Other comprehensive loss before reclassifications

Amount reclassified from accumulated other comprehensive income

Net other comprehensive loss

Ending balance at June 30, 2021

Subsequent Event

Consolidated Statements of Financial Condition under Prepaid expenses and other assets.

Also, the ERTC is a non-taxable credit for state income tax purposes.

As of June 30, 2022 and 2021, the total outstanding ERTC was $ 3.6 million and $ 2.4 million, respectively.

Subsequent Events

On July 28, 2022 , 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 12, 2021 were entitled to receive the cash dividend, which was paid on September 2, 2021 .

Shareholders of the Corporation’s common stock at the close of business on August 18, 2022 were entitled to receive the cash dividend, which will be payable on September 8, 2022 .

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 9A. Controls and Procedures