Item 9A. Controls and Procedures
Item 9A. Controls and Procedures
a) An evaluation of the Corporation’s disclosure controls and procedures (as defined in Section 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934 (the “Act”)) was carried out under the supervision and with the participation of the Corporation’s Chief Executive Officer, Chief Financial Officer and the Corporation’s Disclosure Committee as of the end of the period covered by this report. In designing and evaluating the Corporation’s disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Also, because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been detected. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures as of June 30, 2022 are effective, at the reasonable assurance level, in ensuring that the information required to be disclosed by the Corporation in the reports it files or submits under the Act is (i) accumulated and communicated to the Corporation’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
b) There have been no changes in the Corporation’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the fiscal year ended June 30, 2022, that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting. The Corporation does not expect that its internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.
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Management Report on Internal Control Over Financial Reporting
This management report includes the subsidiary institution of Provident Financial Holdings, Inc. (the "Corporation"), Provident Savings Bank, F.S.B. which is subject to Part 363 in the statement of management's responsibilities; the report on management's assessment of compliance with the Federal laws and regulations pertaining to insider loans and the Federal and, if applicable, State laws and regulations pertaining to dividend restrictions; and the report on management's assessment of internal control over financial reporting.
Management of the Corporation is responsible for preparing the Corporation’s annual consolidated financial statements in accordance with generally accepted accounting principles; for establishing and maintaining an adequate internal control structure and procedures for financial reporting, including controls over the preparation of regulatory financial statements in accordance with the instructions for the Parent Company Only Financial Statements for Small Holding Companies (Form FR Y-9SP); and for complying with the Federal laws and regulations pertaining to insider loans and the Federal and, if applicable, State laws and regulations pertaining to dividend restrictions. The Corporation's internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
To comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, the Corporation designed and implemented a structured and comprehensive assessment process to evaluate its internal control over financial reporting across the enterprise. The assessment of the effectiveness of the Corporation's internal control over financial reporting was based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management's assessment of the Corporation's internal control over financial reporting was also conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), which include controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for the Parent Company Only Financial Statements for Small Holding Companies (Form FR Y-9SP).
Because of its inherent limitations, including the possibility of human error and the circumvention of overriding controls, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on its assessment, management has concluded that, as of June 30, 2022, the Corporation's internal control over financial reporting, including controls over the preparation of regulatory financial statements in accordance with the instructions for the Parent Company Only Financial Statements for Small Holding Companies (Form FR Y-9SP), is effective based on the criteria established in Internal Control-Integrated Framework (2013).
Management of the Corporation has assessed the Corporation's compliance with the Federal laws and regulations pertaining to insider loans and the Federal and, if applicable, State laws and regulations pertaining to dividend restrictions during the fiscal year ended on June 30, 2022. Management has concluded that the Corporation complied with the Federal laws and regulations pertaining to insider loans and the Federal and, if applicable, State laws and regulations pertaining to dividend restrictions during the fiscal year ended on June 30, 2022.
Date: September 2, 2022
/s/ Craig G. Blunden
Craig G. Blunden
Chairman and Chief Executive Officer
/s/ Donavon P. Ternes
Donavon P. Ternes
President, Chief Operating Officer and
Chief Financial Officer
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Item 9B. Other Information
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not Applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item regarding the Corporation’s Board of Directors is incorporated herein by reference from the section captioned “Proposal I – Election of Directors” in the Corporation’s Proxy Statement, a copy of which will be filed with the Securities and Exchange Commission no later than 120 days after the Corporation’s fiscal year end.
The executive officers of the Corporation and the Bank are elected annually and hold office until their respective successors have been elected and qualified or until death, resignation or removal by the Board of Directors. For information regarding the Corporation’s executive officers, see Item 1, “Business - Executive Officers” in this Form 10-K.
Code of Ethics for Senior Financial Officers
The Corporation has adopted a Code of Ethics, which applies to all directors, officers, and employees of the Corporation. The Code of Ethics is publicly available as Exhibit 14 to the Corporation’s Annual Report on Form 10-K for the fiscal year June 30, 2007, and is available on the Corporation’s website, www.myprovident.com . If the Corporation makes any substantial amendments to the Code of Ethics or grants any waiver, including any implicit waiver, from a provision of the Code to the Corporation’s Chief Executive Officer, Chief Financial Officer or Controller, the Corporation will disclose the nature of such amendment or waiver on the Corporation’s website and in a report on Form 8-K.
Audit Committee and Audit Committee Financial Expert
The Corporation has a separately-designated standing audit committee established in accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The audit committee consists of three independent directors of the Corporation: Joseph P. Barr, Judy A. Carpenter and Debbi H. Guthrie. The Corporation has designated Joseph P. Barr, Audit Committee Chairman, as its audit committee financial expert. Mr. Barr is independent, as independence for audit committee members is defined under the listing standards of the NASDAQ Stock Market, a Certified Public Accountant in California and Ohio (inactive) and has been practicing public accounting for over 46 years.
Nominating Procedures
There have been no material changes to the procedures by which shareholders may recommend nominees to its Board of Directors since last disclosed to shareholders.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference from the sections captioned “Executive Compensation” and “Directors’ Compensation” in the Proxy Statement, a copy of which will be filed with the Securities and Exchange Commission no later than 120 days after the Corporation’s fiscal year end.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
a) Security Ownership of Certain Beneficial Owners.
The information required by this item is incorporated herein by reference from the section captioned “Security Ownership of Certain Beneficial Owners and Management” in the Corporation’s Proxy Statement, a copy of which will be filed with the Securities and Exchange Commission no later than 120 days after the Corporation’s fiscal year end.
b) Security Ownership of Management.
The information required by this item is incorporated herein by reference from the sections captioned “Security Ownership of Certain Beneficial Owners and Management” and “Proposal 1 - Election of Directors” in the Corporation’s Proxy Statement, a copy of which will be filed with the Securities and Exchange Commission no later than 120 days after the Corporation’s fiscal year end.
c) Changes in Control.
The Corporation is not aware of any arrangements, including any pledge by any person of securities of the Corporation, the operation of which may at a subsequent date result in a change in control of the Corporation.
d) Equity Compensation Plan Information.
The following table summarizes share and exercise price information regarding the Corporation's equity compensation plans as of June 30, 2022:
Number of Securities
Remaining Available for
Number of Securities
Future Issuance Under
to Be Issued Upon
Weighted-Average
Equity Compensation
Exercise of
Exercise Price of
Plans (Excluding
Outstanding Options,
Outstanding Options,
Securities Reflected in
Plan Category
Warrants and Rights
Warrants and Rights
Column (a))
(a)
(b)
(c)
Equity compensation plans approved by security holders:
2006 Equity Incentive Plan:
Stock Options
31,000
$
15.78
—
2010 Equity Incentive Plan:
Stock Options
177,000
$
15.74
—
Restricted Stock
3,375
N/A
—
2013 Equity Incentive Plan:
Stock Options
223,000
$
16.70
43,500
Restricted Stock
91,375
N/A
68,250
Equity compensation plans not approved by security holders
N/A
N/A
N/A
Total
525,750
$
16.24
(1)
111,750
(1) Excludes restricted stock from the calculation since restricted stock awards do not contain an exercise price requirement.
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Item 13. Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions. The information required by this item is incorporated herein by reference from the section captioned “Board of Directors’ Meetings, Board Committees and Corporate Governance Matters - Corporate Governance - Certain Relationships and Related Transactions” in the Corporation’s Proxy Statement, a copy of which will be filed with the Securities and Exchange Commission no later than 120 days after the Corporation’s fiscal year end.
Director Independence. The information contained in the section captioned “Board of Directors’ Meetings, Board Committees and Corporate Governance Matters - Corporate Governance - Director Independence” in the Proxy Statement is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference from the section captioned “Proposal 3 - Ratification of Appointment of Independent Auditor” in the Corporation’s Proxy Statement, a copy of which will be filed with the Securities and Exchange Commission no later than 120 days after the Corporation’s fiscal year end.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) 1. Financial Statements
See Exhibit 13 to Consolidated Financial Statements beginning on this Form 10-K.
2. Financial Statement Schedules
Schedules to the Consolidated Financial Statements have been omitted as the required information is inapplicable.
(b) Exhibits
Exhibits are available from the Corporation by written request.
3.1 (a)
Amended and Restated Certificate of Incorporation of Provident Financial Holdings, Inc. as filed with the Delaware Secretary of State on November 24, 2009 (incorporated by reference to Exhibit 3.1 to the Corporation’s Quarterly Report on Form 10-Q filed on November 9, 2010)
3.1 (b)
Amended and Restated Bylaws of Provident Financial Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Corporation’s Current Report on Form 8-K filed on December 1, 2014)
4.1
Form of Certificate of Provident's Common Stock (incorporated by reference to the Corporation’s Registration Statement on Form S-1 (333-2230) filed on March 11, 1996))
4.2
Description of Capital Stock of Provident Financial Holdings, Inc. (incorporated by reference to Exhibit 4.2 to the Corporation’s Annual Report on Form 10-K for the year ended June 30, 2019)
10.1
Employment Agreement with Craig G. Blunden (incorporated by reference to Exhibit 10.1 to the Corporation’s Form 8-K dated December 19, 2005)
10.2
Post-Retirement Compensation Agreement with Craig G. Blunden (incorporated by reference to Exhibit 10.2 to the Corporation’s Form 8-K dated December 19, 2005)
10.3
Post-Retirement Compensation Agreement with Donavon P. Ternes (incorporated by reference to Exhibit 10.1 to the Corporation’s Form 8-K dated July 7, 2009)
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10.4
Form of Severance Agreement with Deborah L. Hill, Robert "Scott" Ritter, Lilian Salter, Donavon P. Ternes, David S. Weiant and Gwendolyn L. Wertz (incorporated by reference to Exhibit 10.1 and 10.2 in the Corporation’s Form 8-K dated February 24, 2012)
10.5
2006 Equity Incentive Plan (incorporated by reference to Exhibit A to the Corporation’s proxy statement dated October 12, 2006)
10.6
Form of Incentive Stock Option Agreement for options granted under the 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.10 in the Corporation’s Form 10-Q for the quarter ended December 31, 2006)
10.7
Form of Non-Qualified Stock Option Agreement for options granted under the 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.11 in the Corporation’s Form 10-Q for the quarter ended December 31, 2006)
10.8
Form of Restricted Stock Agreement for restricted shares awarded under the 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.12 in the Corporation’s Form 10-Q for the quarter ended December 31, 2006)
10.9
2010 Equity Incentive Plan (incorporated by reference to Exhibit A to the Corporation’s proxy statement dated October 28, 2010)
10.10
Form of Incentive Stock Option Agreement for options granted under the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 in the Corporation’s Form 8-K dated November 30, 2010)
10.11
Form of Non-Qualified Stock Option Agreement for options granted under the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 in the Corporation’s Form 8-K dated November 30, 2010)
10.12
Form of Restricted Stock Agreement for restricted shares awarded under the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 in the Corporation’s Form 8-K dated November 30, 2010)
10.13
2013 Equity Incentive Plan (incorporated by reference to Exhibit A to the Corporation’s proxy statement dated October 24, 2013)
10.14
Form of Incentive Stock Option Agreement for options granted under the 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 in the Corporation’s Registration Statement on Form S-8 (333-192727) dated December 9, 2013)
10.15
Form of Non-Qualified Stock Option Agreement for options granted under the 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 in the Corporation’s Registration Statement on Form S-8 (333-192727) dated December 9, 2013)
10.16
Form of Restricted Stock Agreement for restricted shares awarded under the 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 in the Corporation’s Registration Statement on Form S-8 (333-192727) dated December 9, 2013)
13
2022 Annual Report to Stockholders
14.0
Code of Ethics for the Corporation’s directors, officers and employees (Registrant elects to satisfy Regulation S-K §229.406(c) by posting its Code of Ethics on its website at www.myprovident.com in the section titled About: Investor Relations.
21.1
Subsidiaries of the Registrant
23.1
Consent of Independent Registered Public Accounting Firm
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31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
The following materials from the Corporation’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022, formatted in Extensible Business Reporting Language (XBRL): (1) Consolidated Statements of Financial Condition; (2) Consolidated Statements of Operations; (3) Consolidated Statements of Comprehensive Income; (4) Consolidated Statements of Stockholders’ Equity; (5) Consolidated Statements of Cash Flows; and (6) Selected Notes to Consolidated Financial Statements.
104
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
Item 16. Form 10-K Summary.
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date:
September 2, 2022
Provident Financial Holdings, Inc.
/s/ Craig G. Blunden
Craig G. Blunden
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURES
TITLE
DATE
/s/ Craig G. Blunden
Chairman and
September 2, 2022
Craig G. Blunden
Chief Executive Officer
(Principal Executive Officer)
/s/ Donavon P. Ternes
President, Chief Operating Officer
September 2, 2022
Donavon P. Ternes
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Joseph P. Barr
Director
September 2, 2022
Joseph P. Barr
/s/ Bruce W. Bennett
Director
September 2, 2022
Bruce W. Bennett
/s/ Judy A. Carpenter
Director
September 2, 2022
Judy A. Carpenter
/s/ Debbi H. Guthrie
Director
September 2, 2022
Debbi H. Guthrie
/s/ Kathy M. Michalak
Director
September 2, 2022
Kathy M. Michalak
/s/ Roy H. Taylor
Director
September 2, 2022
Roy H. Taylor
/s/ William E. Thomas
Director
September 2, 2022
William E. Thomas
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Provident Financial Holdings, Inc.
Consolidated Financial Statements
Index
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 )
75
Consolidated Statements of Financial Condition as of June 30, 2022 and 2021
77
Consolidated Statements of Operations for the years ended June 30, 2022 and 2021
78
Consolidated Statements of Comprehensive Income for the years ended June 30, 2022 and 2021
79
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2022 and 2021
80
Consolidated Statements of Cash Flows for the years ended June 30, 2022 and 2021
81
Notes to Consolidated Financial Statements
82
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
Provident Financial Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Provident Financial Holdings 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
These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on the Corporation's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Corporation's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
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
Critical Audit Matter Description
Management estimates the Corporation’s allowance for loan losses (“ALL”) for the probable losses inherent in loans held for investment, segregating collectively evaluated allowances and individually evaluated allowances for loans. The total estimate was $5.6 million at June 30, 2022. The determination of the appropriate ALL inherently involves a high degree of subjectivity and requires significant estimates of the existing credit risks using both quantitative and qualitative analyses.
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For the collectively evaluated allowances, the Corporation uses historical experience to develop quantitative loss factors, which it applies to these loans based on management’s assigned internal risk ratings. 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.
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. 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
Our audit procedures related to the qualitative loss factors for certain loan types described above included the following, among others:
● We performed inquiries and examined documentation to understand management’s methodology and process in determining the ALL, including the key assumptions and relevant data utilized.
● We tested the design and operating effectiveness of internal controls over type of loan, loan classification, and determination of the qualitative loss factors and management’s review of the relevant qualitative loss factors.
● We tested the completeness and accuracy of the inputs used in the determination of the loss factors by selecting loans and through the reconciliation of the loan data testing to the ALL data inputs.
● We made a selection of loans and reviewed the supporting loan files, which includes borrower correspondence, payment history, property inspections, and status of current borrower-provided financial information, to evaluate the appropriateness of the loans’ classification considered as input to the ALL.
● 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 Corporation's historical allowance estimation process by comparing the ALL recorded in historical periods to actual results.
/s/ Deloitte & Touche LLP
Costa Mesa, California
September 2, 2022
We have served as the Corporation's auditor since 2001.
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PROVIDENT FINANCIAL HOLDINGS, INC.
Consolidated Statements of Financial Condition
June 30,
June 30,
(In Thousands, Except Share Information)
2022
2021
Assets
Cash and cash equivalents
$
23,414
$
70,270
Investment securities - held to maturity, at cost
185,745
223,306
Investment securities - available for sale, at fair value
2,676
3,587
Loans held for investment, net of allowance for loan losses of $ 5,564 and $ 7,587 , respectively; 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
939,992
850,960
Accrued interest receivable
2,966
2,999
Federal Home Loan Bank (“FHLB”) - San Francisco stock
8,239
8,155
Premises and equipment, net
8,826
9,377
Prepaid expenses and other assets
15,180
14,942
Total assets
$
1,187,038
$
1,183,596
Liabilities and Stockholders’ Equity
Liabilities:
Non interest-bearing deposits
$
125,089
$
123,179
Interest-bearing deposits
830,415
814,794
Total deposits
955,504
937,973
Borrowings
85,000
100,983
Accounts payable, accrued interest and other liabilities
17,884
17,360
Total liabilities
1,058,388
1,056,316
Commitments and Contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $ 0.01 par value ( 2,000,000 shares authorized; none issued and outstanding)
—
—
Common stock, $ 0.01 par value; ( 40,000,000 shares authorized; 18,229,615 and 18,229,615 shares issued; 7,285,184 and 7,541,469 shares outstanding, respectively)
183
183
Additional paid-in capital
98,826
97,978
Retained earnings
202,680
197,733
Treasury stock at cost ( 10,944,431 and 10,688,146 shares, respectively)
( 173,041 )
( 168,686 )
Accumulated other comprehensive income, net of tax
2
72
Total stockholders’ equity
128,650
127,280
Total liabilities and stockholders’ equity
$
1,187,038
$
1,183,596
The accompanying notes are an integral part of these consolidated financial statements.
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PROVIDENT FINANCIAL HOLDINGS, INC.
Consolidated Statements of Operations
Year Ended June 30,
(In Thousands, Except Per Share Information)
2022
2021
Interest income:
Loans receivable, net
$
32,161
$
32,856
Investment securities
1,906
1,849
FHLB - San Francisco stock
489
418
Interest-earning deposits
174
78
Total interest income
34,730
35,201
Interest expense:
Deposits
1,144
1,745
Borrowings
1,991
2,817
Total interest expense
3,135
4,562
Net interest income
31,595
30,639
Recovery from the allowance for loan losses
( 2,462 )
( 708 )
Net interest income, after recovery from the the allowance for loan losses
34,057
31,347
Non-interest income:
Loan servicing and other fees
1,056
1,170
Deposit account fees
1,302
1,247
Card and processing fees
1,639
1,605
Other
719
551
Total non-interest income
4,716
4,573
Non-interest expense:
Salaries and employee benefits
15,833
15,157
Premises and occupancy
3,189
3,500
Equipment expense
1,282
1,153
Professional expense
1,419
1,561
Sales and marketing expense
642
680
Deposit insurance premium and regulatory assessments
543
552
Other
3,007
3,130
Total non-interest expense
25,915
25,733
Income before income taxes
12,858
10,187
Provision for income taxes
3,765
2,626
Net income
$
9,093
$
7,561
Basic earnings per share
$
1.23
$
1.01
Diluted earnings per share
$
1.22
$
1.00
The accompanying notes are an integral part of these consolidated financial statements.
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PROVIDENT FINANCIAL HOLDINGS, INC.
Consolidated Statements of Comprehensive Income
Year Ended June 30,
(In Thousands)
2022
2021
Net income
$
9,093
$
7,561
Change in unrealized holding losses on securities available for sale and interest-only strips
( 99 )
( 45 )
Reclassification of losses to net income
—
—
Other comprehensive loss, before income tax benefit
( 99 )
( 45 )
Income tax benefit
( 29 )
( 13 )
Other comprehensive loss
( 70 )
( 32 )
Total comprehensive income
$
9,023
$
7,529
The accompanying notes are an integral part of these consolidated financial statements.
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PROVIDENT FINANCIAL HOLDINGS, INC.
Consolidated Statements of Stockholders’ Equity
Accumulated
Other
Common
Comprehensive
Stock
Additional
Income (Loss),
(In Thousands, Except Share Information)
Shares
Amount
Paid-In Capital
Retained Earnings
Treasury Stock
Net of Tax
Total
Balance at June 30, 2020
7,436,315
$
181
$
95,593
$
194,345
$
( 166,247 )
$
104
$
123,976
Net income
7,561
7,561
Other comprehensive loss
( 32 )
( 32 )
Purchase of treasury stock (1)
( 139,596 )
( 2,336 )
( 2,336 )
Distribution of restricted stock
112,750
—
Forfeiture of restricted stock
103
( 103 )
—
Amortization of restricted stock
1,206
1,206
Exercise of stock options
132,000
2
979
981
Stock options expense
97
97
Cash dividends (2)
( 4,173 )
( 4,173 )
Balance at June 30, 2021
7,541,469
$
183
$
97,978
$
197,733
$
( 168,686 )
$
72
$
127,280
Net income
9,093
9,093
Other comprehensive loss
( 70 )
( 70 )
Purchase of treasury stock
( 257,285 )
( 4,305 )
( 4,305 )
Distribution of restricted stock
1,000
—
Awards for restricted stock
( 9 )
9
—
Forfeiture of restricted stock
59
( 59 )
—
Amortization of restricted stock
747
747
Stock options expense
51
51
Cash dividends (2)
( 4,146 )
( 4,146 )
Balance at June 30, 2022
7,285,184
$
183
$
98,826
$
202,680
$
( 173,041 )
$
2
$
128,650
(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.
The accompanying notes are an integral part of these consolidated financial statements.
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PROVIDENT FINANCIAL HOLDINGS, INC.
Consolidated Statements of Cash Flows
Year Ended June 30,
(In Thousands)
2022
2021
Cash flows from operating activities:
Net income
$
9,093
$
7,561
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
4,849
6,266
Recovery from the allowance for loan losses
( 2,462 )
( 708 )
Stock-based compensation
798
1,303
Provision for deferred income taxes
1,140
481
Increase (decrease) in accounts payable, accrued interest and other liabilities
484
( 658 )
Increase in prepaid expenses and other assets
( 2,109 )
( 2,672 )
Net cash provided by operating activities
11,793
11,573
Cash flows from investing activities:
(Increase) decrease in loans held for investment, net
( 88,320 )
50,088
Purchase of investment securities - held to maturity
( 19,120 )
( 158,984 )
Maturity of investment securities - held to maturity
600
800
Principal payments from investment securities - held to maturity
54,530
51,544
Principal payments from investment securities - available for sale
813
1,090
Purchase of FHLB - San Francisco stock
( 84 )
( 185 )
Purchase of premises and equipment
( 165 )
( 225 )
Net cash used for investing activities
( 51,746 )
( 55,872 )
Cash flows from financing activities:
Increase in deposits, net
17,531
45,004
Repayments of long-term borrowings
( 20,983 )
( 35,064 )
Proceeds from (repayment of) short-term borrowings, net
5,000
( 5,000 )
Treasury stock purchases
( 4,305 )
( 2,336 )
Proceeds from exercise of stock options
—
981
Withholding taxes on stock-based compensation
—
( 877 )
Cash dividends
( 4,146 )
( 4,173 )
Net cash used for financing activities
( 6,903 )
( 1,465 )
Net decrease in cash and cash equivalents
( 46,856 )
( 45,764 )
Cash and cash equivalents at beginning of year
70,270
116,034
Cash and cash equivalents at end of year
$
23,414
$
70,270
Supplemental information:
Cash paid for interest
$
3,171
$
4,660
Cash paid for income taxes
$
2,725
$
3,320
The accompanying notes are an integral part of these consolidated financial statements.
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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
Note 1: Organization and Summary of Significant Accounting Policies
Basis of presentation
The consolidated financial statements include the accounts of Provident Financial Holdings, Inc., and its wholly owned subsidiary, Provident Savings Bank, F.S.B. (collectively, the “Corporation”). All inter-company balances and transactions have been eliminated.
Provident Savings Bank, F.S.B. (the “Bank”) converted from a federally chartered mutual savings bank to a federally chartered stock savings bank effective June 27, 1996. Provident Financial Holdings, Inc., a Delaware corporation organized by the Bank, acquired all of the capital stock of the Bank issued in the conversion; the transaction was recorded on a book value basis.
The Corporation has determined that it operates in one business segment through the Bank. The Bank's activities include attracting deposits, offering banking services and originating and purchasing single-family, multi-family, commercial real estate, construction and 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. Additional activities may include originating saleable single-family loans, primarily fixed-rate first mortgages. Loans are primarily originated and purchased in Southern and Northern California.
Use of estimates
The accounting and reporting policies of the Corporation conform to generally accepted accounting principles in the United States of America (“GAAP”). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the loan repurchase reserve, the valuation of investment securities, the valuation of loans held for investment at fair value, deferred tax assets, loan servicing assets, real estate owned and deferred compensation costs.
The following accounting policies, together with those disclosed elsewhere in the consolidated financial statements, represent the significant accounting policies of Provident Financial Holdings, Inc. and the Bank.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and due from banks, as well as overnight deposits placed at the Federal Reserve Bank – San Francisco and correspondent banks.
Investment securities
The Corporation classifies its qualifying investments as available for sale or held to maturity. The Corporation classifies investments as held to maturity when it has the ability and it is management’s positive intent to hold such securities to maturity. Securities held to maturity are carried at amortized historical cost. All other securities are classified as available for sale and are carried at fair value. Fair value generally is determined based upon quoted market prices. Changes in net unrealized gains (losses) on securities available for sale are included in accumulated other comprehensive income, net of tax. Gains and losses on sale or dispositions of investment securities are included in non-interest income and are determined using the specific identification method. Purchase premiums and discounts are amortized over the expected average life of the securities using the effective interest method.
Investment securities are reviewed annually for possible other-than-temporary impairment (“OTTI”). For debt securities, an OTTI is evident if the Corporation intends to sell the debt security or will more likely than not be required to sell the debt security before full recovery of the entire amortized cost basis is realized. However, even if the Corporation does not intend to sell the debt security and will not likely be required to sell the debt security before recovery of its entire amortized cost basis, the Corporation must evaluate expected cash flows to be received and determine if a credit loss has occurred. In the event of a credit loss, the credit component of the impairment is recognized within non-interest income and the non-credit component is recognized through accumulated other comprehensive income, net of tax.
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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
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 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.
Net loan origination fees and certain direct origination expenses are deferred and amortized to interest income over the contractual life of the loan using the effective interest method. Amortization is discontinued for non-performing loans. Interest receivable represents, for the most part, the current month’s interest, which will be included as a part of the borrower’s next monthly loan payment. Interest receivable is accrued only if deemed collectible. Loans are placed on non-performing status when they become 90 days past due or if the loan is deemed impaired. When a loan is placed on non-performing status, interest accrued but not received is reversed against interest income. Interest income on non-performing loans is subsequently recognized only to the extent that cash is received and the principal balance is deemed collectible. If the principal balance is not deemed collectible, the entire payment received (principal and interest) is applied to the outstanding loan balance. Non-performing loans that become current as to both principal and interest are returned to accrual status after demonstrating satisfactory payment history (usually six consecutive months) and when future payments are expected to be collected.
Allowance for loan losses
The allowance for loan losses involves significant judgment and assumptions by management, which has a material impact on the carrying value of net loans. Management considers the accounting estimate related to the allowance for loan losses a critical accounting estimate because it is highly susceptible to changes from period to period, requiring management to make assumptions about probable incurred losses inherent in the loan portfolio at the balance sheet date. The impact of a sudden large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings.
The allowance is based on two principles of accounting: (i) 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.
The allowance has two components: collectively evaluated allowances and individually evaluated allowances. Each of these components is based upon estimates that can change over time. The allowance is based on historical experience and, as a result, can differ from actual losses incurred in the future. 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. Management considers, based on currently available information, the allowance for loan losses sufficient to absorb probable losses inherent in loans held for investment. Various techniques are used to arrive at an individually evaluated allowance, including discounted cash flows and the fair market value of collateral. The use of these techniques is inherently subjective and the actual losses could be greater or less than the estimates.
Allowance for unfunded loan commitments
The Corporation maintains the allowance for unfunded loan commitments at a level that is adequate to absorb estimated probable losses related to these unfunded credit facilities. The Corporation determines the adequacy of the allowance based on periodic evaluations of the unfunded credit facilities, including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities. The allowance for unfunded loan commitments is recorded in other liabilities on the Consolidated Statements of Financial Condition. Net adjustments to the allowance for unfunded loan commitments are included in other non-interest expense on the Consolidated Statements of Operations.
Loans in forbearance
On March 27, 2020, the 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
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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
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 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, 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.
Troubled debt restructuring (“restructured loans”)
A restructured loan is a loan which the Corporation, for reasons related to a borrower’s financial difficulties, grants a more than insignificant concession to the borrower that the Corporation would not otherwise consider. These financial difficulties include, but are not limited to, the borrowers’ default status on any of their debts, bankruptcy and recent changes in their financial circumstances (loss of job, etc.).
The loan terms which have been modified or restructured due to a borrower’s financial difficulty, may include but are not limited to:
a) A reduction in the stated interest rate.
b) An extension of the maturity at an interest rate below market.
c) A reduction in the accrued interest.
d) Extensions, deferrals, renewals and rewrites.
e) Loans that have been discharged in a Chapter 7 Bankruptcy that have not been reaffirmed by the borrower.
To qualify for restructuring, a borrower must provide evidence of creditworthiness such as, current financial statements, most recent income tax returns, current paystubs, current W-2s, and most recent bank statements, among other documents, which are then verified by the Corporation. The Corporation re-underwrites the loan with the borrower’s updated financial information, new credit report, current loan balance, new interest rate, remaining loan term, updated property value and modified payment schedule, among other considerations, to determine if the borrower qualifies.
The Corporation measures the allowance for loan losses of restructured loans based on the difference between the loan’s original carrying amount and the present value of expected future cash flows discounted at the original effective yield of the loan. Based on the OCC guidance with respect to restructured loans and to conform to general practices within the banking industry, the Corporation maintains certain restructured loans on accrual status, provided there is reasonable assurance of repayment and performance, consistent with the modified terms based upon a current, well-documented credit evaluation. All other restructured loans are classified as “Substandard” and placed on non-performing status.
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. 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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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
Non-performing loans
The Corporation assesses loans individually and classifies as non-performing when the accrual of interest has been discontinued, loans have been restructured or management has serious doubts about the future collectability of principal and interest, even though the loans may currently be performing. Factors considered in determining classification include, but are not limited to, expected future cash flows, the financial condition of the borrower and current economic conditions. The Corporation measures each non-performing loan based on ASC 310, establishes a collectively evaluated or individually evaluated allowance and charges off those loans or portions of loans deemed uncollectible.
Real estate owned
Real estate acquired through foreclosure is initially recorded at the fair value of the real estate acquired, less estimated selling costs. Subsequent to foreclosure, the Corporation charges current earnings for estimated losses if the carrying value of the property exceeds its fair value. Gains or losses on the sale of real estate are recognized upon disposition of the property. Costs relating to improvement, maintenance and repairs of the property are expensed as incurred under gain (loss) on sale and operations of real estate owned acquired in the settlement of loans within the Consolidated Statements of Operations.
Impairment of long-lived assets
The Corporation reviews its long-lived assets for impairment annually or when events or circumstances indicate that the carrying amount of these assets may not be recoverable. Long-lived assets include buildings, land, fixtures, furniture and equipment. An asset is considered impaired when the expected discounted cash flows over the remaining useful life are less than the net book value. When impairment is indicated for an asset, the amount of impairment loss is the excess of the net book value over its fair value.
Premises and equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed primarily on a straight-line basis over the estimated useful lives as follows:
Buildings
10 to 40 years
Furniture and fixtures
3 to 10 years
Automobiles
3 to 5 years
Computer equipment
3 to 5 years
Leasehold improvements are amortized over the lesser of their respective lease terms or the useful life of the improvement, which ranges from one to 10 years . Maintenance and repair costs are charged to operations as incurred.
Income taxes
The Corporation accounts for income taxes in accordance with ASC 740, “Income Taxes.” ASC 740 requires the affirmative evaluation that it is more likely than not, based on the technical merits of a tax position, that an enterprise is entitled to economic benefits resulting from positions taken in income tax returns. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements.
ASC 740 requires that when determining the need for a valuation allowance against a deferred tax asset, management must assess both positive and negative evidence with regard to the realizability of the tax losses represented by that asset. To the extent available, if sources of taxable income are insufficient to absorb tax losses, a valuation allowance is necessary. Sources of taxable income for this analysis include prior years’ tax returns, the expected reversals of taxable temporary differences between book and tax income, prudent and feasible tax-planning strategies, and future taxable income. The deferred income tax asset related to the allowance for loan losses will be realized when actual charge-offs are made against the allowance. Based on the availability of loss carry-backs and projected taxable income during the periods for which loss carry-forwards are available, management believes it is more likely than not the Corporation will realize the deferred tax asset. The Corporation continues to monitor the deferred tax asset on a quarterly basis for a valuation allowance. The future realization of these tax benefits primarily hinges on adequate future earnings to utilize the tax benefit. Prospective earnings or losses, tax law changes or capital changes could prompt the Corporation to reevaluate the assumptions which may be used to establish a valuation allowance. As of June 30, 2022 and 2021, the estimated deferred tax asset, which is included in prepaid expenses and other assets, was $ 1.4 million and $ 2.5 million, respectively. The Corporation maintains net deferred tax assets for deductible temporary tax differences, such as loss reserves, deferred compensation, non-accrued
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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
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 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 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. The Corporation adopted ASC 715-60-35 using the latter option, i.e., based on the future death benefit. The Bank purchases BOLI policies on the lives of certain executive officers while they are employed by the Bank and is the owner and beneficiary of the policies. The Bank invests in BOLI to provide an efficient form of funding for long-term retirement and other employee benefits costs. The Bank records these BOLI policies within prepaid expenses and other assets in the Consolidated Statements of Financial Condition at each policy’s respective cash surrender value, with net changes recorded in other non-interest income in the Consolidated Statements of Operations.
Cash dividend
A declaration or payment of dividends is at the discretion of the Corporation’s Board of Directors, who take into account the Corporation’s financial condition, results of operations, tax considerations, capital requirements, industry standards, economic conditions and other factors, including the regulatory restrictions which affect the payment of dividends by the Bank to the Corporation. Under Delaware law, dividends may be paid either out of surplus or, if there is no surplus, out of net profits for the current fiscal year and/or the preceding fiscal year in which the dividend is declared. For additional information, see Note 19 of the Notes to Consolidated Financial Statements regarding the subsequent event related to the cash dividend.
Stock repurchases
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”)
Basic EPS represents net income divided by the weighted average common shares outstanding during the period excluding any potential dilutive effects. Diluted EPS gives effect to any potential issuance of common stock that would have caused basic EPS to be lower as if the issuance had already occurred. Accordingly, diluted EPS reflects an increase in the weighted average shares outstanding as a result of the assumed exercise of stock options and the vesting of restricted stock. The computation of diluted EPS does not assume exercise of stock options and vesting of restricted stock that would have an anti-dilutive effect on EPS.
Stock-based compensation
ASC 718, “Compensation – Stock Compensation,” requires companies to recognize in the 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")
The Corporation recognizes compensation expense when the Bank contributes funds to the ESOP for the purchase of the Corporation’s common stock to be allocated to the ESOP participants. Since the contributions are discretionary, the benefits payable under the ESOP cannot be estimated.
Restricted stock
The Corporation recognizes compensation expense over the vesting period of the shares awarded, equal to the fair value of the shares at the award date. A total of $ 747,000 and $ 1.2 million of restricted stock expense was amortized during fiscal 2022 and 2021, respectively.
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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
Post-retirement benefits
The estimated obligation for post-retirement health care and life insurance benefits is determined based on an actuarial computation of the cost of current and future benefits for the eligible (grandfathered) retirees and employees. The post retirement benefit liability is included in accounts payable, accrued interest and other liabilities in the Consolidated Statements of Financial Condition. Effective July 1, 2003, the Corporation discontinued the post-retirement health care and life insurance benefits to any employee not previously qualified (grandfathered) for these benefits. At June 30, 2022 and 2021, the accrued liability for post-retirement benefits was $ 174,000 and $ 125,000 , respectively, which was fully funded consistent with actuarially determined estimates of the future obligation.
Comprehensive income
ASC 220, “Comprehensive Income,” requires that realized revenue, expenses, gains and losses be included in net income (loss). Unrealized gains (losses) on available for sale securities and interest-only strips are reported as a separate component of the stockholders’ equity section of the Consolidated Statements of Financial Condition and the change in the unrealized gains (losses) are reported on the Consolidated Statements of Comprehensive Income and Consolidated Statements of Stockholders’ Equity.
Accounting standard updates (“ASU”)
ASU 2021-10:
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.
ASU 2016-13:
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, 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): Effective Dates” extending the adoption date for certain registrants, including the Corporation. These ASUs will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Corporation is evaluating its current expected loss methodology of its loan and investment portfolios to identify the necessary modifications in accordance with these standards and expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. A valuation adjustment to its allowance for loan losses or investment portfolio that is identified in this process will be reflected as a one-time adjustment in equity rather than earnings upon adoption. The Corporation is in the process of compiling historical data that will be used to calculate expected credit losses on its loan portfolio to ensure the Corporation is fully compliant with these ASUs at the adoption date and is evaluating the potential impact 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.
ASU 2020-04:
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of reference Rate Reform on Financial Reporting. This ASU applies to contracts, hedging relationships and other transactions that reference 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-
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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.
Note 2: Investment Securities
The amortized cost and estimated fair value of investment securities as of June 30, 2022 and 2021 were as follows:
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Fair
Carrying
June 30, 2022
Cost
Gains
(Losses)
Value
Value
(In Thousands)
Held to maturity
U.S. government sponsored enterprise MBS (1)
$
180,492
$
63
$
( 13,945 )
$
166,610
$
180,492
U.S. government sponsored enterprise CMO (2)
3,913
—
( 150 )
3,763
3,913
U.S. SBA securities (3)
940
11
—
951
940
Certificate of deposits
400
—
—
400
400
Total investment securities - held to maturity
185,745
74
( 14,095 )
171,724
185,745
Available for sale
U.S. government agency MBS (1)
1,698
6
( 6 )
1,698
1,698
U.S. government sponsored enterprise MBS (1)
865
4
( 4 )
865
865
Private issue CMO (2)
118
—
( 5 )
113
113
Total investment securities - available for sale
2,681
10
( 15 )
2,676
2,676
Total investment securities
$
188,426
$
84
$
( 14,110 )
$
174,400
$
188,421
(1) Mortgage-backed securities (“MBS”).
(2) Collateralized Mortgage Obligations (“CMO”).
(3) Small Business Administration ("SBA").
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Fair
Carrying
June 30, 2021
Cost
Gains
(Losses)
Value
Value
(In Thousands)
Held to maturity
U.S. government sponsored enterprise MBS
$
220,448
$
2,209
$
( 810 )
$
221,847
$
220,448
U.S. SBA securities
1,858
16
—
1,874
1,858
Certificate of deposits
1,000
—
—
1,000
1,000
Total investment securities - held to maturity
223,306
2,225
( 810 )
224,721
223,306
Available for sale
U.S. government agency MBS
2,146
76
—
2,222
2,222
U.S. government sponsored enterprise MBS
1,197
14
—
1,211
1,211
Private issue CMO
151
3
—
154
154
Total investment securities - available for sale
3,494
93
—
3,587
3,587
Total investment securities
$
226,800
$
2,318
$
( 810 )
$
228,308
$
226,893
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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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
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
Unrealized Holding Losses
Unrealized Holding Losses
Unrealized Holding Losses
(In Thousands)
Less Than 12 Months
12 Months or More
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Description of Securities
Value
Losses
Value
Losses
Value
Losses
Held to maturity
U.S. government sponsored enterprise MBS
$
121,844
$
9,018
$
35,528
$
4,927
$
157,372
$
13,945
U.S. government sponsored enterprise CMO
3,764
150
—
—
3,764
150
Total investment securities - held to maturity
125,608
9,168
35,528
4,927
161,136
14,095
Available for sale
U.S government agency MBS
826
6
—
—
826
6
U.S. government sponsored enterprise MBS
671
4
—
—
671
4
Private issue CMO
113
5
—
—
113
5
Total investment securities - available for sale
1,610
15
—
—
1,610
15
Total investment securities
$
127,218
$
9,183
$
35,528
$
4,927
$
162,746
$
14,110
As of June 30, 2021
Unrealized Holding Losses
Unrealized Holding Losses
Unrealized Holding Losses
(In Thousands)
Less Than 12 Months
12 Months or More
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Description of Securities
Value
Losses
Value
Losses
Value
Losses
Held to maturity
U.S. government sponsored enterprise MBS
$
84,600
$
810
$
—
$
—
$
84,600
$
810
Total investment securities - held to maturity
84,600
810
—
—
84,600
810
Total investment securities
$
84,600
$
810
$
—
$
—
$
84,600
$
810
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 Corporation does not believe that there was any OTTI at June 30, 2022 and 2021. At each of these dates, the Corporation intended and had the ability to hold the investment securities and was not likely to be required to sell the securities before realizing a full recovery.
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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
Contractual maturities of investment securities as of June 30, 2022 and 2021 were as follows:
June 30, 2022
June 30, 2021
Estimated
Estimated
Amortized
Fair
Amortized
Fair
(In Thousands)
Cost
Value
Cost
Value
Held to maturity
Due in one year or less
$
1,427
$
1,425
$
1,209
$
1,218
Due after one through five years
10,908
10,805
14,544
15,179
Due after five through ten years
77,167
72,625
90,798
91,780
Due after ten years
96,243
86,869
116,755
116,544
Total investment securities - held to maturity
$
185,745
$
171,724
$
223,306
$
224,721
Available for sale
Due in one year or less
$
—
$
—
$
—
$
—
Due after one through five years
—
—
—
—
Due after five through ten years
98
98
—
—
Due after ten years
2,583
2,578
3,494
3,587
Total investment securities - available for sale
$
2,681
$
2,676
$
3,494
$
3,587
Total investment securities
$
188,426
$
174,400
$
226,800
$
228,308
Note 3: Loans Held for Investment
Loans held for investment consisted of the following at June 30, 2022 and 2021:
(In Thousands)
June 30, 2022
June 30, 2021
Mortgage loans:
Single-family
$
378,234
$
268,272
Multi-family
464,676
484,408
Commercial real estate
90,429
95,279
Construction
3,216
3,040
Other
123
139
Commercial business loans
1,206
849
Consumer loans
86
95
Total loans held for investment, gross
937,970
852,082
Advance payments of escrows
47
157
Deferred loan costs, net
7,539
6,308
Allowance for loan losses
( 5,564 )
( 7,587 )
Total loans held for investment, net
$
939,992
$
850,960
The following table sets forth information at June 30, 2022 regarding the dollar amount of loans held for investment that are contractually repricing during the periods indicated, segregated between adjustable rate loans and fixed rate loans. Fixed-rate loans comprised 11 % and 4 % of loans held for investment at June 30, 2022 and June 30, 2021, respectively. Adjustable rate loans having no stated repricing date that reprice when the index to which they are tied to reprices (e.g. prime rate index) and checking account overdrafts are reported as repricing within one year. The table does not include
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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
any estimate of prepayments which may cause the Corporation’s actual repricing experience to differ materially from that shown.
Adjustable Rate
After
After
After
Within
One Year
3 Years
5 Years
(In Thousands)
One Year
Through 3 Years
Through 5 Years
Through 10 Years
Fixed Rate
Total
Mortgage loans:
Single-family
$
49,101
$
25,507
$
35,862
$
170,359
$
97,405
$
378,234
Multi-family
135,586
131,136
146,148
51,634
172
464,676
Commercial real estate
46,777
20,934
21,382
—
1,336
90,429
Construction
2,142
—
—
—
1,074
3,216
Other
—
—
—
—
123
123
Commercial business loans
869
—
—
—
337
1,206
Consumer loans
86
—
—
—
—
86
Total loans held for investment, gross
$
234,561
$
177,577
$
203,392
$
221,993
$
100,447
$
937,970
The Corporation has developed an internal loan grading system to evaluate and quantify the Bank’s loans held for investment portfolio with respect to quality and risk. Management continually evaluates the credit quality of the Corporation’s loan portfolio and conducts a quarterly review of the adequacy of the allowance for loan losses using quantitative and qualitative methods. The Corporation has adopted an internal risk rating policy in which each loan is rated for credit quality with a rating of pass, special mention, substandard, doubtful or loss. The two primary components that are used during the loan review process to determine the proper allowance levels are individually evaluated allowances and collectively evaluated allowances. Quantitative loan loss factors are developed by determining the historical loss experience, expected future cash flows, discount rates and collateral fair values, among others. Qualitative loan loss factors are developed by assessing general economic indicators such as Gross Domestic Product, Retail Sales, Unemployment Rates, Employment Growth, California Home Sales and Median California Home Prices, among others. The Corporation assigns individual factors for the quantitative and qualitative methods for each loan category and each internal risk rating.
The Corporation categorizes all of the loans held for investment into risk categories based on relevant information about the ability of the borrower to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.
A description of the general characteristics of the risk grades is as follows:
◾ Pass - These loans range from minimal credit risk to average however still acceptable credit risk. The likelihood of loss is considered remote.
◾ Special Mention - A special mention asset has potential weaknesses that may be temporary or, if left uncorrected, may result in a loss. While concerns exist, the Bank is currently protected and loss is considered unlikely and not imminent.
◾ Substandard - A substandard loan is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that may jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
◾ Doubtful - A doubtful loan has all of the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable.
◾ Loss - A loss loan is considered uncollectible and of such little value that continuance as an asset of the Bank is not warranted.
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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
The following tables summarize gross loans held for investment by loan types and risk category at the dates indicated:
June 30, 2022
Commercial
Other
Commercial
(In Thousands)
Single-family
Multi-family
Real Estate
Construction
Mortgage
Business
Consumer
Total
Pass
$
376,502
$
464,676
$
90,429
$
3,216
$
123
$
1,206
$
86
$
936,238
Special Mention
224
—
—
—
—
—
—
224
Substandard
1,508
—
—
—
—
—
—
1,508
Total loans held for investment, gross
$
378,234
$
464,676
$
90,429
$
3,216
$
123
$
1,206
$
86
$
937,970
June 30, 2021
Commercial
Other
Commercial
(In Thousands)
Single-family
Multi-family
Real Estate
Construction
Mortgage
Business
Consumer
Total
Pass
$
258,217
$
483,289
$
95,279
$
3,040
$
139
$
849
$
95
$
840,908
Special Mention
1,767
—
—
—
—
—
—
1,767
Substandard
8,288
1,119
—
—
—
—
—
9,407
Total loans held for investment, gross
$
268,272
$
484,408
$
95,279
$
3,040
$
139
$
849
$
95
$
852,082
The allowance for loan losses is maintained at a level sufficient to provide for estimated losses based on evaluating known and inherent risks in the loans held for investment and upon management’s continuing analysis of the factors underlying the quality of the loans held for investment. These factors include changes in the size and composition of the loans held for investment, actual loan loss experience, current economic conditions, detailed analysis of individual loans for which full collectability may not be assured, and determination of the realizable value of the collateral securing the loans. Provisions (recoveries) for loan losses are charged (credited) against operations on a quarterly basis, as necessary, to maintain the allowance at appropriate levels. 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 reports as restructured loans, the charge-off occurs when the loan becomes 90 days delinquent; and where borrowers file bankruptcy, the charge-off occurs when the loan becomes 60 days delinquent. The amount of the charge-off is determined by comparing the loan balance to the estimated fair value of the underlying collateral, less disposition costs, with the loan balance in excess of the estimated fair value charged-off against the allowance for loan losses. The allowance for loan losses for non-performing loans is determined by applying ASC 310, “Receivables.” For restructured loans that are less than 90 days delinquent, the allowance for loan losses are segregated into (a) individually evaluated allowances for those loans with applicable discounted cash flow calculations still in their restructuring period, classified lower than pass, and containing an embedded loss component or (b) collectively evaluated allowances based on the aggregated pooling method. For non-performing loans less than 60 days delinquent where the borrower has filed bankruptcy, the collectively evaluated allowances are assigned based on the aggregated pooling method. For non-performing commercial real estate loans, individually evaluated allowances are calculated based on their fair values and if their fair values are higher than their loan balances, no allowances are required.
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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
The following tables summarize the Corporation’s allowance for loan losses and recorded investment in gross loans, by portfolio type, at the dates and for the years indicated.
Year Ended June 30, 2022
Commercial
Commercial
(In Thousands)
Single-family
Multi-family
Real Estate
Construction
Other Mortgage
Business
Consumer
Total
Allowance at beginning of period
$
2,000
$
4,485
$
1,006
$
51
$
3
$
36
$
6
$
7,587
(Recovery) provision for loan losses
( 1,056 )
( 1,203 )
( 190 )
( 28 )
—
16
( 1 )
( 2,462 )
Recoveries
439
—
—
—
—
—
—
439
Charge-offs
—
—
—
—
—
—
—
—
Allowance for loan losses, end of period
$
1,383
$
3,282
$
816
$
23
$
3
$
52
$
5
$
5,564
Allowance:
Individually evaluated for allowances
$
38
$
—
$
—
$
—
$
—
$
—
$
—
$
38
Collectively evaluated for allowances
1,345
3,282
816
23
3
52
5
5,526
Allowance for loan losses, end of period
$
1,383
$
3,282
$
816
$
23
$
3
$
52
$
5
$
5,564
Gross Loans:
Individually evaluated for allowances
$
1,275
$
—
$
—
$
—
$
—
$
—
$
—
$
1,275
Collectively evaluated for allowances
376,959
464,676
90,429
3,216
123
1,206
86
936,695
Total loans held for investment, gross
$
378,234
$
464,676
$
90,429
$
3,216
$
123
$
1,206
$
86
$
937,970
Allowance for loan losses as a percentage of gross loans held for investment
0.37
%
0.71
%
0.90
%
0.72
%
2.44
%
4.31
%
5.81
%
0.59
%
Net (recoveries) charge-offs to average loans receivable, net during the period
( 0.15 )
%
—
%
—
%
—
%
—
%
—
%
—
%
( 0.05 )
%
Year Ended June 30, 2021
Commercial
Commercial
(In Thousands)
Single-family
Multi-family
Real Estate
Construction
Other Mortgage
Business
Consumer
Total
Allowance at beginning of period
$
2,622
$
4,329
$
1,110
$
171
$
3
$
24
$
6
$
8,265
(Recovery) provision for loan losses
( 653 )
156
( 104 )
( 120 )
—
12
1
( 708 )
Recoveries
31
—
—
—
—
—
1
32
Charge-offs
—
—
—
—
—
—
( 2 )
( 2 )
Allowance for loan losses, end of period
$
2,000
$
4,485
$
1,006
$
51
$
3
$
36
$
6
$
7,587
Allowance:
Individually evaluated for allowances
$
384
$
—
$
—
$
—
$
—
$
—
$
—
$
384
Collectively evaluated for allowances
1,616
4,485
1,006
51
3
36
6
7,203
Allowance for loan losses, end of period
$
2,000
$
4,485
$
1,006
$
51
$
3
$
36
$
6
$
7,587
Gross Loans:
Individually evaluated for allowances
$
8,039
$
—
$
—
$
—
$
—
$
—
$
—
$
8,039
Collectively evaluated for allowances
260,233
484,408
95,279
3,040
139
849
95
844,043
Total loans held for investment, gross
$
268,272
$
484,408
$
95,279
$
3,040
$
139
$
849
$
95
$
852,082
Allowance for loan losses as a percentage of gross loans held for investment
0.75
%
0.93
%
1.06
%
1.68
%
2.16
%
4.24
%
6.32
%
0.88
%
Net (recoveries) charge-offs to average loans receivable, net during the period
( 0.01 )
%
—
%
—
%
—
%
—
%
—
%
1.22
%
( 0.00 )
%
The following summarizes the components of the net change in the allowance for loan losses for the years indicated:
Year Ended June 30,
(In Thousands)
2022
2021
Balance, beginning of year
$
7,587
$
8,265
Recovery from the allowance for loan losses
( 2,462 )
( 708 )
Recoveries
439
32
Charge-offs
—
( 2 )
Balance, end of year
$
5,564
$
7,587
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
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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
doubtful. In addition, interest income is not recognized on any loan where management has determined that collection is not reasonably assured. A non-performing loan may be restored to accrual status when delinquent principal and interest payments are brought current and future monthly principal and interest payments are expected to be collected on a timely basis. Loans with a related allowance reserve have been individually evaluated for impairment using either a discounted cash flow analysis or, for collateral dependent loans, current appraisals less costs to sell to establish realizable value. This evaluation may identify a specific impairment amount needed or may conclude that no reserve is needed. Loans that are not individually evaluated for impairment are included in pools of homogeneous loans for evaluation of related allowance reserves.
At or For the Year Ended June 30, 2022
Unpaid
Net
Average
Interest
Principal
Related
Recorded
Recorded
Recorded
Income
(In Thousands)
Balance
Charge-offs
Investment
Allowance (1)
Investment
Investment
Recognized
Mortgage loans:
Single-family:
With a related allowance
$
993
$
—
$
993
$
( 85 )
$
908
$
2,594
$
98
Without a related allowance (2)
548
( 33 )
515
—
515
635
232
Total single-family loans
1,541
( 33 )
1,508
( 85 )
1,423
3,229
330
Multi-family:
With a related allowance
—
—
—
—
—
957
46
Total multi-family loans
—
—
—
—
—
957
46
Total non-performing loans
$
1,541
$
( 33 )
$
1,508
$
( 85 )
$
1,423
$
4,186
$
376
(1) Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan.
(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.
At or For the Year Ended June 30, 2021
Unpaid
Related
Net
Average
Interest
Principal
Charge-offs
Recorded
Recorded
Recorded
Income
(In Thousands)
Balance
Related
Investment
Allowance (1)
Investment
Investment
Recognized
Mortgage loans:
Single-family:
With a related allowance
$
7,400
$
—
$
7,400
$
( 434 )
$
6,966
$
7,187
$
140
Without a related allowance (2)
1,335
( 436 )
899
—
899
1,516
—
Total single-family loans
8,735
( 436 )
8,299
( 434 )
7,865
8,703
140
Multi-family:
With a related allowance
1,119
—
1,119
( 338 )
781
374
15
Total mutlti-family loans
1,119
—
1,119
( 338 )
781
374
15
Commercial business loans:
With a related allowance
—
—
—
—
—
13
1
Total commercial business loans
—
—
—
—
—
13
1
Total non-performing loans
$
9,854
$
( 436 )
$
9,418
$
( 772 )
$
8,646
$
9,090
$
156
(1) Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan.
(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.
At June 30, 2022 and 2021, there were no commitments to lend additional funds to those borrowers whose loans were classified as non-performing.
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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. The Corporation records payments on non-performing loans utilizing the cash basis or cost recovery method of accounting during the periods when the loans are on non-performing status. For the fiscal year ended June 30, 2022, the Bank received $ 405,000 in interest payments from non-performing loans, of which $ 376,000 was recognized as interest income. The remaining $ 29,000 was applied to reduce the loan balances under the cost recovery method. In comparison, for the fiscal year ended June 30, 2021, the Bank received $ 209,000 in interest payments from non-performing loans, of which $ 156,000 was recognized as interest income. The remaining $ 53,000 was applied to reduce the loan balances under the cost recovery method.
The Corporation has modified loans in accordance with the CARES Act and Interagency Statement. 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, 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:
Forbearance Granted
Forbearance Completed (1)
Forbearance Remaining
Number of
Number of
Number of
(Dollars In Thousands)
Loans
Amount
Loans
Amount
Loans
Amount
Single-family loans
59
$
22,980
59
$
22,980
—
$
—
Multi-family loans
5
2,268
5
2,268
—
—
Commercial real estate loans
3
1,954
3
1,954
—
—
Total loan forbearance
67
$
27,202
67
$
27,202
—
$
—
(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 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.
June 30, 2022
30-89 Days Past
Total Loans Held for
(In Thousands)
Current
Due
Non-Accrual (1)
Investment, Gross
Mortgage loans:
Single-family
$
376,726
$
—
$
1,508
$
378,234
Multi-family
464,676
—
—
464,676
Commercial real estate
90,429
—
—
90,429
Construction
3,216
—
—
3,216
Other
123
—
—
123
Commercial business loans
1,206
—
—
1,206
Consumer loans
83
3
—
86
Total loans held for investment, gross
$
936,459
$
3
$
1,508
$
937,970
(1) All loans 90 days or greater past due are placed on non-accrual status.
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Notes to Consolidated Financial Statements
June 30, 2021
30-89 Days Past
Total Loans Held for
(In Thousands)
Current
Due
Non-Accrual (1)
Investment, Gross
Mortgage loans:
Single-family
$
259,984
$
—
$
8,288
$
268,272
Multi-family
483,289
—
1,119
484,408
Commercial real estate
95,279
—
—
95,279
Construction
3,040
—
—
3,040
Other
139
—
—
139
Commercial business loans
849
—
—
849
Consumer loans
88
7
—
95
Total loans held for investment, gross
$
842,668
$
7
$
9,407
$
852,082
(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 ; two loans were upgraded to the pass category; three 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, 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. At both June 30, 2022 and June 30, 2021, there were no commitments to lend additional funds to those borrowers whose loans were restructured.
The following table summarizes at the dates indicated the restructured loan balances, net of allowance for loan losses or charge-offs, by loan type and non-accrual versus accrual status at June 30, 2022 and 2021 :
At June 30,
(In Thousands)
2022
2021
Restructured loans on non-accrual status:
Mortgage loans:
Single-family
$
722
$
6,983
Total
722
6,983
Restructured loans on accrual status:
Mortgage loans:
Single-family
3,748
876
Total
3,748
876
Total restructured loans
$
4,470
$
7,859
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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
The following tables show the restructured loans by type, net of allowance for loan losses or charge-offs, at June 30, 2022 and 2021:
At June 30, 2022
Unpaid
Net
Principal
Related
Recorded
Recorded
(In Thousands)
Balance
Charge-offs
Investment
Allowance (1)
Investment
Mortgage loans:
Single-family:
With a related allowance
$
760
$
—
$
760
$
( 38 )
$
722
Without a related allowance (2)
3,748
—
3,748
—
3,748
Total single-family
4,508
—
4,508
( 38 )
4,470
Total restructured loans
$
4,508
$
—
$
4,508
$
( 38 )
$
4,470
(1) Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan.
(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.
At June 30, 2021
Unpaid
Net
Principal
Related
Recorded
Recorded
(In Thousands)
Balance
Charge-offs
Investment
Allowance (1)
Investment
Mortgage loans:
Single-family:
With a related allowance
$
7,151
$
—
$
7,151
$
( 384 )
$
6,767
Without a related allowance (2)
1,457
( 365 )
1,092
—
1,092
Total single-family
8,608
( 365 )
8,243
( 384 )
7,859
Total restructured loans
$
8,608
$
( 365 )
$
8,243
$
( 384 )
$
7,859
(1) Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan.
(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.
In the ordinary course of business, the Bank makes loans to its directors, officers and employees on substantially the same terms prevailing at the time of origination for comparable transactions with unaffiliated borrowers. The following is a summary of related-party loan activity:
Year Ended June 30,
(In Thousands)
2022
2021
Balance, beginning of year
$
—
$
1
Sales and payments
—
( 1 )
Balance, end of year
$
—
$
—
As of June 30, 2022 and 2021, there were no outstanding related-party loans.
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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
Note 4: Leases
The Corporation accounts for its leases in accordance with ASC 842, which was implemented on July 1, 2019, and requires the Corporation to record liabilities for future lease obligations as well as assets representing the right to use the underlying leased assets. The Corporation’s leases primarily represent future obligations to make payments for the use of buildings, space or equipment for its operations. Liabilities to make future lease payments are recorded in accounts payable, accrued interest and other liabilities, while right-of-use assets are recorded in premises and equipment in the Corporation’s Consolidated Statements of Financial Condition. At June 30, 2022, all of the Corporation’s leases were classified as operating leases and the Corporation did not have any operating leases with an initial term of 12 months or less (“short-term leases”).
Liabilities to make future lease payments and right-of-use assets are recorded for operating leases and do not include short-term leases. These liabilities and right-of-use assets are determined based on the total contractual base rents for each lease, which include options to extend or renew each lease, where applicable, and where the Corporation believes it has an economic incentive to extend or renew the lease. Due to the fact that lease extensions are not reasonably certain, the Corporation generally does not recognize payments occurring during option periods in the calculation of its operating right-of-use lease assets and operating lease liabilities. The Corporation utilizes the FHLB - San Francisco interest rates as a discount rate for each of the remaining contractual terms at the adoption date as well as for future leases if the discount rate is not stated in the lease. For leases that contain variable lease payments, the Corporation assumes future lease payment escalations based on a lease payment escalation rate specified in the lease or the specified index rate observed at the time of lease commencement. Liabilities to make future lease payments are accounted for using the interest method, being reduced by periodic contractual lease payments net of periodic interest accretion. Right-of-use assets for operating leases are amortized over the term of the associated lease by amounts that represent the difference between periodic straight-line lease expense and periodic interest accretion in the related liability to make future lease payments.
For the fiscal years ended June 30, 2022 and 2021, expenses associated with the Corporation’s leases totaled $ 880,000 and $ 866,000 , respectively, and were recorded in premises and occupancy expenses and equipment expenses in the Consolidated Statements of Operations.
The following table presents supplemental information related to operating leases at the date and for the years indicated:
As of
(In Thousands)
June 30, 2022
June 30, 2021
Consolidated Statements of Condition:
Premises and equipment - Operating lease right of use assets
$
1,969
$
2,117
Accounts payable, accrued interest and other liabilities – Operating lease liabilities
$
1,998
$
2,192
Year Ended June 30,
2022
2021
Consolidated Statements of Operations:
Premises and occupancy expenses from operating leases (1)
$
788
$
797
Equipment expenses from operating leases
$
92
$
69
Consolidated Statements of Cash Flows:
Operating cash flows from operating leases, net
$
921
$
905
(1) Includes immaterial variable lease costs.
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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
The following table provides information related to remaining minimum contractual lease payments and other information associated with the Corporation’s leases as of June 30, 2022:
Amount (1)
Year Ending June 30,
(In Thousands)
2023
$
832
2024
555
2025
400
2026
236
2027
39
Thereafter
—
Total contract lease payments
$
2,062
Total liability to make lease payments
$
1,998
Difference in undiscounted and discounted future lease payments
$
64
Weighted average discount rate
1.97
%
Weighted average remaining lease term (years)
3.1
(1) Contractual base rents do not include property taxes and other operating expenses due under respective lease agreements.
Note 5: Premises and Equipment
Premises and equipment at June 30, 2022 and 2021 consisted of the following:
June 30,
(In Thousands)
2022
2021
Land
$
2,853
$
2,853
Buildings
9,896
9,772
Leasehold improvements
2,996
3,033
Furniture and equipment
5,427
5,416
Automobiles
167
164
Operating lease – right of use assets (1)
1,969
2,117
23,308
23,355
Less accumulated depreciation and amortization
( 14,482 )
( 13,978 )
Total premises and equipment, net
$
8,826
$
9,377
(1)
Net of accumulated amortization.
Depreciation and amortization expense for the years ended June 30, 2022 and 2021 amounted to $ 1.5 million and $ 1.6 million, respectively.
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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
Note 6: Deposits
Deposits at June 30, 2022 and 2021 consisted of the following:
June 30, 2022
June 30, 2021
(Dollars in Thousands)
Interest Rate
Amount
Interest Rate
Amount
Checking deposits – non interest-bearing
—
$
125,089
—
$
123,179
Checking deposits – interest-bearing (1)
0.00 % - 0.20 %
335,788
0.00 % - 0.20 %
327,388
Savings deposits (1)
0.00 % - 0.70 %
333,581
0.00 % - 0.70 %
307,299
Money market deposits (1)
0.00 % - 2.00 %
39,897
0.00 % - 2.00 %
39,670
Time deposits: (1)
Under $100
0.00 % - 2.13 %
60,721
0.00 % - 2.13 %
71,026
$100 and over
0.05 % - 2.13 %
60,428
0.05 % - 2.13 %
69,411
Total deposits
$
955,504
$
937,973
Weighted-average interest rate on deposits
0.11
%
0.15
%
(1) Certain interest-bearing checking, savings, money market and time deposits require a minimum balance to earn interest.
The aggregate annual maturities of time deposits at June 30, 2022 and 2021 were as follows:
June 30,
(In Thousands)
2022
2021
One year or less
$
78,644
$
76,705
Over one to two years
20,600
37,687
Over two to three years
13,890
11,230
Over three to four years
3,552
11,923
Over four to five years
3,186
2,493
Over five years
1,277
399
Total time deposits
$
121,149
$
140,437
Interest expense on deposits for the years indicated is summarized as follows:
Year Ended June 30,
(In Thousands)
2022
2021
Checking deposits – interest-bearing
$
149
$
188
Savings deposits
172
208
Money market deposits
71
80
Time deposits
752
1,269
Total interest expense on deposits
$
1,144
$
1,745
The Bank is required to maintain reserve balances with the Federal Reserve Bank of San Francisco. 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.
Note 7: Borrowings
Advances from the FHLB – San Francisco, which mature on various dates through 2025, are collateralized by pledges of certain real estate loans with an aggregate balance at June 30, 2022 and 2021 of $ 570.4 million and $ 607.0 million, respectively. In addition, the Bank pledged investment securities totaling $ 4.7 million and $ 1.6 million to collateralize its FHLB – San Francisco advances under the Securities-Backed Credit (“SBC”) program at June 30, 2022 and 2021, respectively. The Bank’s FHLB – San Francisco borrowing capacity, which is limited to 35 % of total assets reported on the Bank’s quarterly Call Report, was approximately $ 415.7 million and $ 416.2 million at June 30, 2022 and 2021, respectively. As of June 30, 2022 and 2021, the remaining/available borrowing facility was $ 310.3 million and $ 296.8 million, respectively, and the remaining/available collateral was $ 310.5 million and $ 343.1 million, respectively.
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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
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, 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. As of both June 30, 2022 and 2021, there were no outstanding borrowings under the discount window facility or the federal funds facility with the correspondent bank.
Borrowings at June 30, 2022 and 2021 consisted of the following:
June 30,
(In Thousands)
2022
2021
FHLB - San Francisco advances
$
85,000
$
100,983
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, 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. 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.
The following tables set forth certain information regarding borrowings by the Bank at the dates and for the years indicated:
At or For the Year Ended June 30,
(Dollars in Thousands)
2022
2021
Balance outstanding at the end of year:
FHLB - San Francisco advances
$
85,000
$
100,983
Weighted-average rate at the end of year:
FHLB - San Francisco advances
2.20
%
2.19
%
Maximum amount of borrowings outstanding at any month end:
FHLB - San Francisco advances
$
100,978
$
141,042
Average short-term borrowings during the year with respect to: (1)
FHLB - San Francisco advances
$
25,513
$
35,631
Weighted-average short-term borrowing rate during the year with respect to: (1)
FHLB - San Francisco advances
1.87
%
2.14
%
(1) Borrowings with a remaining term of 12 months or less.
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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
The aggregate annual contractual maturities of borrowings at June 30, 2022 and 2021 were as follows:
June 30,
(Dollars in Thousands)
2022
2021
Within one year
$
35,000
$
20,983
Over one to two years
30,000
30,000
Over two to three years
20,000
30,000
Over three to four years
—
20,000
Over four to five years
—
—
Over five years
—
—
Total borrowings
$
85,000
$
100,983
Weighted average interest rate
2.20
%
2.19
%
Note 8: Income Taxes
ASC 740, “Income Taxes,” requires the affirmative evaluation that it is more likely than not, based on the technical merits of a tax position, that an enterprise is entitled to economic benefits resulting from positions taken in income tax returns. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. Management has determined that there were no unrecognized tax benefits to be reported in the Corporation’s consolidated financial statements for the years ended June 30, 2022 and 2021.
Under generally accepted accounting principles, the Corporation uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
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 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.
The provision for income taxes for the years indicated consisted of the following:
Year Ended June 30,
(In Thousands)
2022
2021
Current:
Federal
$
1,781
$
1,547
State
844
598
2,625
2,145
Deferred:
Federal
696
303
State
444
178
1,140
481
Provision for income taxes
$
3,765
$
2,626
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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.
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to net income before income taxes as a result of the following differences for the years indicated:
Year Ended June 30,
2022
2021
(In Thousands)
Amount
Tax Rate
Amount
Tax Rate
Federal income tax at statutory rate
$
2,700
21.00
%
$
2,139
21.00
%
State income tax, net of federal income tax benefit
988
7.68
%
614
6.05
%
Changes in taxes resulting from:
Bank-owned life insurance
( 39 )
( 0.31 )
%
( 40 )
( 0.39 )
%
Non-deductible expenses
8
0.06
%
6
0.06
%
Non-deductible stock-based compensation
—
—
%
( 30 )
( 0.30 )
%
Excess tax benefit on stock-based compensation
—
—
%
( 64 )
—
%
Return to provision adjustment
107
0.84
%
—
—
%
Other
1
0.01
%
1
( 0.64 )
%
Effective income tax
$
3,765
29.28
%
$
2,626
25.78
%
Deferred tax assets at June 30, 2022 and 2021 by jurisdiction were as follows:
June 30,
(In Thousands)
2022
2021
Deferred taxes - federal
$
947
$
1,617
Deferred taxes - state
485
926
Total net deferred tax assets
$
1,432
$
2,543
Net deferred tax assets at June 30, 2022 and 2021 were comprised of the following:
June 30,
(In Thousands)
2022
2021
Loss reserves
$
1,968
$
2,734
Non-accrued interest
199
392
Deferred compensation
2,903
2,512
Accrued vacation
178
197
Depreciation
211
153
State tax
64
—
Other
245
307
Total deferred tax assets
5,768
6,295
FHLB - San Francisco stock dividends
( 645 )
( 645 )
Prepaid expenses
( 28 )
( 41 )
Unrealized loss (gain) on investment securities
1
( 27 )
Unrealized gain on interest-only strips
( 2 )
( 3 )
Deferred loan costs
( 3,662 )
( 2,974 )
State tax
—
( 62 )
Total deferred tax liabilities
( 4,336 )
( 3,752 )
Net deferred tax assets
$
1,432
$
2,543
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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. The Corporation analyzes the deferred tax assets to determine whether a valuation allowance is required based on the more-likely-than-not criteria that such assets will be realized principally through future taxable income. This criteria takes into account the actual earnings and the estimates of future profitability. The Corporation may carryback net federal tax losses to the preceding five taxable years and forward to the succeeding 20 taxable years. At June 30, 2022 and 2021, the Corporation had no federal and state net tax loss carryforwards. Based on management’s consideration of historical and anticipated future income before income taxes, as well as the reversal period for the items giving rise to the deferred tax assets and liabilities, a valuation allowance was not considered necessary at June 30, 2022 and 2021 and management believes it is more likely than not the Corporation will realize its deferred tax asset.
Retained earnings at June 30, 2022 and 2021 include approximately $ 9.0 million (pre-1988 bad debt reserve for tax purposes) for which federal income tax of $ 3.1 million has not been provided. If the amounts that qualify as deductions for federal income tax purposes are later used for purposes other than for bad debt losses, including distribution in liquidation, they will be subject to federal income tax at the then-current corporate tax rate. If those amounts are not so used, they will not be subject to tax even in the event the Bank were to convert its charter from a thrift to a bank.
The Corporation files income tax returns for the United States and California jurisdictions. The Internal Revenue Service has audited the Bank’s income tax returns through 1996 and the California Franchise Tax Board has audited the Bank through 1990. Also, the Internal Revenue Service completed a review of the Corporation’s income tax returns for fiscal 2006 and 2007; and the California Franchise Tax Board completed a review of the Corporation’s income tax returns for fiscal 2009 and 2010. Fiscal years of 2019 and thereafter remain subject to federal examination, while the California state tax returns for fiscal years 2018 and thereafter are subject to examination by state taxing authorities.
It is the Corporation’s policy to record any penalties or interest charges arising from federal or state taxes as a component of income tax expense. For the fiscal years ended June 30, 2022 and 2021, there were no tax penalties and no interest charges arising from federal or state taxes.
Note 9: Capital
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
For a bank holding company such as the Corporation with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis. The Federal Reserve expects the holding company’s subsidiary bank to be well capitalized under the prompt corrective action regulations. 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 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 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.
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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):
Regulatory Requirements
Minimum for Capital
Minimum to Be
Actual
Adequacy Purposes (1)
Well Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
Provident Savings Bank, F.S.B.:
As of June 30, 2022
Tier 1 leverage capital (to adjusted average assets)
$
124,871
10.47
%
$
47,699
4.00
%
$
59,624
5.00
%
CET1 capital (to risk-weighted assets)
$
124,871
19.58
%
$
44,653
7.00
%
$
41,463
6.50
%
Tier 1 capital (to risk-weighted assets)
$
124,871
19.58
%
$
54,221
8.50
%
$
51,032
8.00
%
Total capital (to risk-weighted assets)
$
130,565
20.47
%
$
66,979
10.50
%
$
63,790
10.00
%
As of June 30, 2021
Tier 1 leverage capital (to adjusted average assets)
$
121,621
10.19
%
$
47,736
4.00
%
$
59,670
5.00
%
CET1 capital (to risk-weighted assets)
$
121,621
18.58
%
$
45,816
7.00
%
$
42,544
6.50
%
Tier 1 capital (to risk-weighted assets)
$
121,621
18.58
%
$
55,634
8.50
%
$
52,361
8.00
%
Total capital (to risk-weighted assets)
$
129,335
19.76
%
$
68,724
10.50
%
$
65,452
10.00
%
(1) Inclusive of the conservation buffer of 2.50% for CET1 capital, Tier 1 capital and Total capital ratios.
At June 30, 2022, the Bank exceeded all regulatory capital requirements. The Bank was categorized as "well-capitalized" at June 30, 2022 under the regulations of the OCC.
The ability of the Corporation to pay dividends to stockholders depends primarily on the ability of the Bank to pay dividends to the Corporation. The 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. However, an institution deemed to be in need of more than normal supervision or in troubled condition by the OCC may have its dividend authority restricted by the OCC. If the Bank, however, proposes to make a capital distribution when it does not meet its capital requirements (or will not following the proposed capital distribution) or that will exceed these net income-based limitations, it must obtain the OCC's approval prior to making such distribution. In addition, the Bank must file a prior written notice of a dividend with the Federal Reserve. 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 2022 and 2021, the Bank declared and paid $ 7.5 million and $ 5.0 million of cash dividends to its parent, the Corporation, respectively.
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Notes to Consolidated Financial Statements
Note 10: Benefit Plans
The Corporation has a 401(k) defined-contribution plan covering all employees meeting specific age and service requirements. Under the plan, employees may contribute to the plan from their pretax compensation up to the limits set by the Internal Revenue Service. The Corporation makes matching contributions up to 3 % of a participants’ pretax compensation. Participants vest immediately in their own contributions with 100 % vesting in the Corporation’s contributions occurring after six years of credited service. The Corporation’s expense for the plan was approximately $ 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. At June 30, 2022 and 2021, the accrued liability of the post-retirement compensation agreements was $ 6.8 million and $ 6.6 million, respectively; costs are being accrued and expensed annually. For fiscal 2022 and 2021, the accrued expense for these liabilities was $ 217,000 and $ 563,000 , respectively. The current obligation for these post-retirement benefits was fully funded consistent with contractual requirements and actuarially determined estimates of the total future obligation. The Corporation invests in BOLI to provide sufficient funding for these post-retirement obligations. As of June 30, 2022 and 2021, the total outstanding cash surrender value of the BOLI was $ 8.2 million and $ 8.0 million, respectively. For fiscal 2022 and 2021, the total BOLI non-taxable income, net of mortality cost was $ 188,000 and $ 191,000 , respectively.
Employee Stock Ownership Plan
The Corporation established an ESOP on June 27, 1996 for all employees who are age 21 or older and have completed one year of service with the Corporation during which they have served a minimum of 1,000 hours.
The Corporation recognizes compensation expense when the Corporation contributes funds to the ESOP for the purchase of the Corporation’s common stock to be allocated to the ESOP participants. The Corporation's contribution to the ESOP plan is discretionary. During fiscal 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.
Benefits generally become 100 % vested after six years of credited service. Vesting accelerates upon retirement, death or disability of the participant or in the event of a change in control of the Corporation. Forfeitures are reallocated among remaining participating employees in the same proportion as contributions. Benefits are payable upon death, retirement, early retirement, disability or separation from service.
The net expense related to the ESOP for the years ended June 30, 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, 2021 and 2020 were 40,000 shares at both dates.
Note 11: 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”, 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 Plans for directors, advisory directors, directors emeriti, officers and employees of the Corporation and its subsidiary. The 2013 Plan authorizes 300,000 stock options and 300,000 shares of restricted stock. The 2013 Plan also provides that no person may be granted more than 60,000 stock options or 45,000 shares of restricted stock in any one year. The 2010 Plan authorized 586,250 stock options and 288,750 shares of restricted stock. 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.
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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
Equity Incentive Plans - Stock Options. Under the Plans, options may not be granted at a price less than the fair market value at the date of the grant. Options typically vest over a five-year or shorter period as long as the director, advisory director, director emeritus, officer or employee remains in service to the Corporation. The options are exercisable after vesting for up to the remaining term of the original grant. The maximum term of the options granted is 10 years .
The fair value of each option grant is estimated using the Black-Scholes option valuation model with the following assumptions as of the grant date for the periods indicated. The expected volatility is based on implied volatility from historical common stock closing prices for the prior 84 months . The expected dividend yield is based on the most recent quarterly dividend on an annualized basis. The expected term is based on the historical experience of all fully vested stock option grants and is reviewed annually. The risk-free interest rate is based on the U.S. Treasury note rate with a term similar to the underlying stock option on the particular grant date.
Fiscal 2022
Fiscal 2021
Expected volatility
20.3
%
—
%
Weighted-average volatility
20.3
%
—
%
Expected dividend yield
3.4
%
—
%
Expected term (in years)
7.4
—
Risk-free interest rate
1.4
%
—
%
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:
Weighted-
Weighted-
Average
Aggregate
Average
Remaining
Intrinsic
Exercise
Contractual
Value
Options
Shares
Price
Term (Years)
($000)
Outstanding at June 30, 2020
554,500
$
14.07
Granted
—
$
—
Exercised
( 132,000 )
$
7.43
Forfeited
( 5,500 )
$
10.68
Outstanding at June 30, 2021
417,000
$
16.22
4.28
$
760
Vested and expected to vest at June 30, 2021
408,000
$
16.13
4.20
$
760
Exercisable at June 30, 2021
372,000
$
15.74
3.84
$
760
Outstanding at June 30, 2021
417,000
$
16.22
Granted
17,000
$
16.70
Exercised
—
$
—
Forfeited
—
$
—
Expired
( 3,000 )
$
16.70
Outstanding at June 30, 2022
431,000
$
16.24
3.48
$
63
Vested and expected to vest at June 30, 2022
419,200
$
16.15
3.36
$
63
Exercisable at June 30, 2022
372,000
$
15.74
2.84
$
63
As of June 30, 2022 and 2021, there was $ 94,000 and $ 114,000 of unrecognized compensation expense, respectively, related to unvested share-based compensation arrangements with respect to stock options issued under the Plans. The expense is expected to be recognized over a weighted-average period of 1.6 years and 1.9 years, respectively. The forfeiture
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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. The Corporation used 300,000 shares, 288,750 shares and 185,000 shares of its treasury stock to fund awards of restricted stock under the 2013 Plan, the 2010 Plan and the 2006 Plan, respectively. Awarded shares typically vest over a five-year or shorter period as long as the director, advisory director, director emeriti, officer or employee remains in service to the Corporation. Once vested, a recipient of restricted stock will have all rights of a shareholder, including the power to vote and the right to receive dividends. The Corporation recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the award date.
In fiscal 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:
Weighted-Average
Award Date
Unvested Shares
Shares
Fair Value
Unvested at June 30, 2020
225,500
$
18.55
Awarded
—
$
—
Vested
( 112,750 )
$
18.53
Forfeited
( 11,500 )
$
18.57
Unvested at June 30, 2021
101,250
$
18.57
Expected to vest at June 30, 2021
81,000
$
18.57
Unvested at June 30, 2021
101,250
$
18.57
Awarded
1,000
$
16.70
Vested
( 1,000 )
$
16.70
Forfeited
( 6,500 )
$
18.57
Unvested at June 30, 2022
94,750
$
18.57
Expected to vest at June 30, 2022
75,800
$
18.57
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 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.
Note 12: Earnings Per Share
Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the earnings of the Corporation.
As of June 30, 2022 and 2021, there were outstanding options to purchase 431,000 shares and 417,000 shares of the Corporation’s common stock, respectively, of which 130,000 shares and 116,000 shares, respectively, were excluded from the diluted EPS computation as their effect was anti-dilutive. As of June 30, 2022 and 2021, there were outstanding restricted stock awards of 94,750 shares and 101,250 shares, respectively.
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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:
For the Year Ended June 30, 2022
Income
Shares
Per-Share
(Dollars in Thousands, Except Share Amount)
(Numerator)
(Denominator)
Amount
Basic EPS
$
9,093
7,404,089
$
1.23
Effect of dilutive shares:
Stock options
29,614
Restricted stock
15,301
Diluted EPS
$
9,093
7,449,004
$
1.22
For the Year Ended June 30, 2021
Income
Shares
Per-Share
(Dollars in Thousands, Except Share Amount)
(Numerator)
(Denominator)
Amount
Basic EPS
$
7,561
7,464,814
$
1.01
Effect of dilutive shares:
Stock options
49,917
Restricted stock
23,678
Diluted EPS
$
7,561
7,538,409
$
1.00
Note 13: Commitments and Contingencies
Periodically, there have been various claims and lawsuits involving the Corporation, such as claims to enforce liens, condemnation proceedings on properties in which the Corporation holds security interests, claims involving the making and servicing of real property loans, employment matters and other issues in the ordinary course of and incidental to the Corporation’s business. These proceedings and the associated legal claims are often contested and the outcome of individual matters is not always predictable. Additionally, in some actions, it is difficult to assess potential exposure because the Corporation is still in the early stages of the litigation. The Corporation is not a party to any pending legal proceedings that it believes would have a material adverse effect on its financial condition, operations or cash flows.
The Corporation conducts a portion of its operations in leased facilities and has maintenance contracts under non-cancelable agreements classified as operating leases, which include leases recorded under ASC 842 on liabilities for future lease obligations as well as assets representing the right to use the underlying leased assets (See Note 5 of the Notes to Consolidated Financial Statements).
The following is a schedule of the Corporation’s lease and operating commitments:
Amount
Year Ending June 30,
(In Thousands)
2023
$
1,192
2024
589
2025
435
2026
250
2027
41
Thereafter
—
Total minimum payments required
$
2,507
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.
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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. Under these provisions, the Bank is required to repurchase any previously sold loan for which the representations or warranties of the Bank prove to be inaccurate, incomplete or misleading. In the event of a borrower default or fraud, pursuant to a breached representation or warranty, the Bank may be required to reimburse the investor for any losses suffered. As of June 30, 2022 and 2021, the Bank maintained a non-contingent recourse liability related to these representations and warranties of $ 150,000 and $ 175,000 , respectively. In addition, the Bank maintained a recourse liability of $ 10,000 and $ 25,000 at June 30, 2022 and 2021, respectively, for loans sold to the FHLB – San Francisco under the MPF program.
In the ordinary course of business, the Corporation enters into contracts with third parties under which the third parties provide services on behalf of the Corporation. In many of these contracts, the Corporation agrees to indemnify the third party service provider under certain circumstances. The terms of the indemnity vary from contract to contract and the amount of the indemnification liability, if any, cannot be determined. The Corporation also enters into other contracts and agreements; such as, loan sale agreements, litigation settlement agreements, confidentiality agreements, loan servicing agreements, leases and subleases, among others, in which the Corporation agrees to indemnify third parties for acts by the Corporation’s agents, assignees and/or sub-lessees, and employees. Due to the nature of these indemnification provisions, the Corporation cannot calculate its aggregate potential exposure.
Pursuant to their governing instruments, the Corporation and its subsidiaries provide indemnification to directors, officers, employees and, in some cases, agents of the Corporation against certain liabilities incurred as a result of their service on behalf of or at the request of the Corporation and its subsidiaries. It is not possible for the Corporation to determine the aggregate potential exposure resulting from the obligation to provide this indemnity.
Note 14: Derivative and Other Financial Instruments with Off-Balance Sheet Risks
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of originating loans or providing funds under existing lines of credit, loan sale commitments to third parties and option contracts. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the accompanying Consolidated Statements of Financial Condition. The Corporation’s exposure to credit loss, in the event of non-performance by the counterparty to these financial instruments, is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in entering into financial instruments with off-balance sheet risk as it does for on-balance sheet instruments. As of June 30, 2022 and 2021, the Corporation had commitments to extend credit on loans to be held for investment of $ 43.4 million and $ 21.9 million, respectively.
The following table provides information at the dates indicated regarding undisbursed funds to borrowers on existing lines of credit with the Corporation as well as commitments to originate loans to be held for investment at the dates indicated below:
June 30,
Commitments
2022
2021
(In Thousands)
Undisbursed loan funds – Construction loans
$
3,384
$
4,479
Undisbursed lines of credit – Commercial business loans
541
460
Undisbursed lines of credit – Consumer loans
390
425
Commitments to extend credit on loans to be held for investment
43,386
21,887
Total
$
47,701
$
27,251
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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:
Year Ended
June 30,
(In Thousands)
2022
2021
Balance, beginning of the year
$
127
$
126
Provision
3
1
Balance, end of the year
$
130
$
127
Note 15: Fair Value of Financial Instruments
The Corporation adopted ASC 820, “Fair Value Measurements and Disclosures,” and elected the fair value option pursuant to ASC 825, “Financial Instruments” on single-family loans originated for sale. ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 825 permits entities to elect to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the “Fair Value Option”) at specified election dates. At each subsequent reporting date, an entity is required to report unrealized gains and losses on items in earnings for which the fair value option has been elected. The objective of the Fair Value Option is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.
The following table describes the difference at the dates indicated between the aggregate fair value and the aggregate unpaid principal balance of loans held for investment at fair value:
Aggregate
Unpaid
Net
Aggregate
Principal
Unrealized
(In Thousands)
Fair Value
Balance
Loss
As of June 30, 2022:
Loans held for investment, at fair value
$
1,396
$
1,569
$
( 173 )
As of June 30, 2021:
Loans held for investment, at fair value
$
1,874
$
1,934
$
( 60 )
ASC 820 establishes a three-level valuation hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as follows:
Level 1
-
Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.
Level 2
-
Observable inputs other than Level 1 such as: quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated to observable market data for substantially the full term of the asset or liability.
Level 3
-
Unobservable inputs for the asset or liability that use significant assumptions, including assumptions of risks. These unobservable assumptions reflect the Corporation’s estimate of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of pricing models, discounted cash flow models and similar techniques.
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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. If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation.
The Corporation’s financial assets and liabilities measured at fair value on a recurring basis consist of investment securities available for sale, loans held for investment at fair value and interest-only strips; while non-performing loans and MSA are measured at fair value on a nonrecurring basis.
Investment securities - available for sale are primarily comprised of U.S. government agency MBS, U.S. government sponsored enterprise MBS and privately issued CMO. The Corporation utilizes quoted prices in active markets for similar securities for its fair value measurement of MBS (Level 2) and broker price indications for similar securities in non-active markets for its fair value measurement of the privately issued CMO (Level 3).
Loans held for investment at fair value are primarily single-family loans which have been transferred from loans held for sale. The fair value is determined by management estimates of the specific credit risk attributes of each loan, in addition to the quoted secondary-market prices which account for the interest rate characteristics of each loan (Level 3).
Non-performing loans are loans which are inadequately protected by the current sound worth and paying capacity of the borrowers or of the collateral pledged. The non-performing loans are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. The fair value of a non-performing loan is determined based on an observable market price or current appraised value of the underlying collateral. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the collateral. For non-performing loans which are restructured loans, the fair value is derived from discounted cash flow analysis (Level 3), except those which are in the process of foreclosure or 90 days delinquent for which the fair value is derived from the appraised value of its collateral (Level 2). For other non-performing loans which are not restructured loans, other than non-performing commercial real estate loans, the fair value is derived from relative value analysis: historical experience and management estimates by loan type for which collectively evaluated allowances are assigned (Level 3); or the appraised value of its collateral for loans which are in the process of foreclosure or where borrowers file bankruptcy (Level 2). For non-performing commercial real estate loans, the fair value is derived from the appraised value of its collateral (Level 2). Non-performing loans are reviewed and evaluated on at least a quarterly basis for additional allowance and adjusted accordingly, based on the same factors identified above. This loss is not recorded directly as an adjustment to current earnings or other comprehensive income (loss), but rather as a component in determining the overall adequacy of the allowance for loan losses. These adjustments to the estimated fair value of non-performing loans may result in increases or decreases to the provision for loan losses recorded in current earnings.
The Corporation uses the amortization method for its MSA, which amortizes the MSA in proportion to and over the period of estimated net servicing income and assesses the MSA for impairment based on fair value at each reporting date. The fair value of the MSA is derived using the present value method; which includes a third party’s prepayment projections of similar instruments, weighted-average coupon rates, estimated servicing costs and discount interest rates (Level 3).
The fair value of interest-only strips is derived using the same assumptions that are used to value the related MSA (Level 3).
The Corporation’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Corporation’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
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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:
Fair Value Measurement at June 30, 2022 Using:
(In Thousands)
Level 1
Level 2
Level 3
Total
Assets:
Investment securities - available for sale:
U.S. government agency MBS
$
—
$
1,698
$
—
$
1,698
U.S. government sponsored enterprise MBS
—
865
—
865
Private issue CMO
—
—
113
113
Investment securities - available for sale
—
2,563
113
2,676
Loans held for investment, at fair value
—
—
1,396
1,396
Interest-only strips
—
—
7
7
Total assets
$
—
$
2,563
$
1,516
$
4,079
Liabilities:
$
—
$
—
$
—
$
—
Total liabilities
$
—
$
—
$
—
$
—
Fair Value Measurement at June 30, 2021 Using:
(In Thousands)
Level 1
Level 2
Level 3
Total
Assets:
Investment securities - available for sale:
U.S. government agency MBS
$
—
$
2,222
$
—
$
2,222
U.S. government sponsored enterprise MBS
—
1,211
—
1,211
Private issue CMO
—
—
154
154
Investment securities - available for sale
—
3,433
154
3,587
Loans held for investment, at fair value
—
—
1,874
1,874
Interest-only strips
—
—
10
10
Total assets
$
—
$
3,433
$
2,038
$
5,471
Liabilities:
$
—
$
—
$
—
$
—
Total liabilities
$
—
$
—
$
—
$
—
The following is a reconciliation of the beginning and ending balances during the periods shown of recurring fair value measurements recognized in the Consolidated Statements of Financial Condition using Level 3 inputs:
Fair Value Measurement
Using Significant Other Unobservable Inputs
(Level 3)
Private
Loans Held For
Interest-
Issue
Investment, at
Only
(In Thousands)
CMO
fair value (1)
Strips
Total
Beginning balance at June 30, 2021
$
154
$
1,874
$
10
$
2,038
Total gains or losses (realized/unrealized):
Included in earnings
—
( 113 )
—
( 113 )
Included in other comprehensive income (loss)
( 7 )
—
( 3 )
( 10 )
Purchases
—
—
—
—
Issuances
—
—
—
—
Settlements
( 34 )
( 365 )
—
( 399 )
Transfers in and/or out of Level 3
—
—
—
—
Ending balance at June 30, 2022
$
113
$
1,396
$
7
$
1,516
(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.
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Notes to Consolidated Financial Statements
Fair Value Measurement
Using Significant Other Unobservable Inputs
(Level 3)
Private
Loans Held For
Interest-
Issue
Investment, at
Only
(In Thousands)
CMO
fair value (1)
Strips
Total
Beginning balance at June 30, 2020
$
197
$
2,258
$
14
$
2,469
Total gains or losses (realized/ unrealized):
Included in earnings
—
51
—
51
Included in other comprehensive income (loss)
9
—
( 4 )
5
Purchases
—
—
—
—
Issuances
—
—
—
—
Settlements
( 52 )
( 435 )
—
( 487 )
Transfers in and/or out of Level 3
—
—
—
—
Ending balance at June 30, 2021
$
154
$
1,874
$
10
$
2,038
(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.
The following fair value hierarchy table presents information about the Corporation’s assets measured at fair value at the dates indicated on a nonrecurring basis:
Fair Value Measurement at June 30, 2022 Using:
(In Thousands)
Level 1
Level 2
Level 3
Total
Non-performing loans
$
—
$
515
$
908
$
1,423
Mortgage servicing assets
—
—
168
168
Total
$
—
$
515
$
1,076
$
1,591
Fair Value Measurement at June 30, 2021 Using:
(In Thousands)
Level 1
Level 2
Level 3
Total
Non-performing loans
$
—
$
899
$
7,747
$
8,646
Mortgage servicing assets
—
—
208
208
Total
$
—
$
899
$
7,955
$
8,854
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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:
Impact to
Fair Value
Valuation
As of
from an
June 30,
Valuation
Range (1)
Increase in
(Dollars In Thousands)
2022
Techniques
Unobservable Inputs
(Weighted Average)
Inputs (2)
Assets:
Securities available-for sale: Private issue CMO
$
113
Market comparable pricing
Comparability adjustment
0.96 %
Increase
Loans held for investment, at fair value
$
1,396
Relative value analysis
Broker quotes
91.1 % - 98.0 % ( 93.4 % ) of par
Increase
Credit risk factor
1.2 % - 100.0 % ( 4.6 %)
Decrease
Non-performing loans (3)
$
722
Discounted cash flow
Default rates
5.0 %
Decrease
Non-performing loans (4)
$
186
Relative value analysis
Credit risk factor
20.0 %
Decrease
Mortgage servicing assets
$
168
Discounted cash flow
Prepayment rate (CPR)
4.8 % - 60.0 % ( 10.9 %)
Decrease
Discount rate
9.0 % - 10.5 % ( 9.0 %)
Decrease
Interest-only strips
$
7
Discounted cash flow
Prepayment rate (CPR)
9.5 % - 32.0 % ( 30.6 %)
Decrease
Discount rate
9.0 %
Decrease
Liabilities:
None
(1) The range is based on the historical estimated fair values and management estimates.
(2) Unless otherwise noted, this column represents the directional change in the fair value of the Level 3 investments that would result from an increase to the corresponding unobservable input. A decrease to the unobservable input would have the opposite effect. Significant changes in these inputs in isolation could result in significantly higher or lower fair value measurements.
(3) Consist of restructured loans.
(4) Consist of other non-performing loans, excluding restructured loans.
The significant unobservable inputs used in the fair value measurement of the Corporation’s assets and liabilities include the following: CMO offered quotes, prepayment 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.
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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
The carrying amount and fair value of the Corporation’s other financial instruments as of June 30, 2022 and 2021 were as follows:
June 30, 2022
Carrying
Fair
(In Thousands)
Amount
Value
Level 1
Level 2
Level 3
Financial assets:
Loans held for investment, not recorded at fair value
$
938,596
$
892,339
$
—
$
—
$
892,339
Investment securities - held to maturity
$
185,745
$
171,724
$
—
$
171,724
$
—
FHLB – San Francisco stock
$
8,239
$
8,239
$
—
$
8,239
$
—
Financial liabilities:
Deposits
$
955,504
$
917,220
$
—
$
—
$
917,220
Borrowings
$
85,000
$
84,299
$
—
$
—
$
84,299
June 30, 2021
Carrying
Fair
(In Thousands)
Amount
Value
Level 1
Level 2
Level 3
Financial assets:
Loans held for investment, not recorded at fair value
$
849,086
$
848,727
$
—
$
—
$
848,727
Investment securities - held to maturity
$
223,306
$
224,721
$
—
$
224,721
$
—
FHLB – San Francisco stock
$
8,155
$
8,155
$
—
$
8,155
$
—
Financial liabilities:
Deposits
$
937,973
$
904,673
$
—
$
—
$
904,673
Borrowings
$
100,983
$
104,526
$
—
$
—
$
104,526
Loans held for investment, not recorded at fair value: For loans that reprice frequently at market rates, the carrying amount approximates the fair value. For fixed-rate loans, the fair value is determined by either (i) discounting the estimated future cash flows of such loans over their estimated remaining contractual maturities using a current interest rate at which such loans would be made to borrowers, or (ii) quoted market prices.
Investment securities - held to maturity: The investment securities - held to maturity consist of time deposits at CRA qualified minority financial institutions, U.S. SBA securities, 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, 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: The carrying amount reported for FHLB – San Francisco stock approximates fair value. When redeemed, the Corporation will receive an amount equal to the par value of the stock.
Deposits: The fair value of time deposits is estimated using a discounted cash flow calculation. The discount rate is based upon rates currently offered for deposits of similar remaining maturities. The fair value of transaction accounts (checking, money market and savings accounts) is estimated using a discounted cash flow calculation and management estimates of current market conditions.
Borrowings: The fair value of borrowings has been estimated using a discounted cash flow calculation. The discount rate on such borrowings is based upon rates currently offered for borrowings of similar remaining maturities.
The Corporation has various processes and controls in place to ensure that fair value is reasonably estimated. The Corporation generally determines fair value of their Level 3 assets and liabilities by using internally developed models which primarily utilize discounted cash flow techniques and prices obtained from independent management services or brokers. The Corporation performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process.
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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
While the Corporation believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. For the fiscal year ended June 30, 2022, there were no significant changes to the Corporation’s valuation techniques that had, or are expected to have, a material impact on its consolidated financial position or results of operations.
Note 16: Revenue From Contracts With Customers
In accordance with ASC 606, revenues are recognized when goods or services are transferred to the customer in exchange for the consideration the Corporation expects to be entitled to receive. The largest portion of the Corporation’s revenue is from interest income, which is not in the scope of ASC 606. All of the Corporation’s revenue from contracts with customers in the scope of ASC 606 is recognized in non-interest income.
If a contract is determined to be within the scope of ASC 606, the Corporation recognizes revenue as it satisfies a performance obligation. Payments from customers are generally collected at the time services are rendered, monthly, or quarterly. For contracts with customers within the scope of ASC 606, revenue is either earned at a point in time or revenue is earned over time. Examples of revenue earned at a point in time are automated teller machine ("ATM") transaction fees, wire transfer fees, overdraft fees and interchange fees. Revenue is primarily based on the number and type of transactions that are generally derived from transactional information accumulated by the Bank's systems and is recognized immediately as the transactions occur or upon providing the service to complete the customer's transaction. The Corporation is generally the principal in these contracts, with the exception of interchanges fees, in which case the Corporation is acting as the agent and records revenue net of expenses paid to the principal. Examples of revenue earned over time, which generally occur on a monthly basis, are deposit account maintenance fees, investment advisory fees, merchant revenue, trust and investment management fees and safe deposit box fees. Revenue is generally derived from transactional information accumulated by its systems or those of third-parties and is recognized as the related transactions occur or services are rendered to the customer.
Disaggregation of Revenue:
The following table includes the Corporation's non-interest income disaggregated by type of services for the fiscal years ended June 30, 2022 and 2021:
Year Ended June 30,
Type of Services
2022
2021
(In Thousands)
Loan servicing and other fees (1)
$
1,056
$
1,170
Deposit account fees
1,302
1,247
Card and processing fees
1,639
1,605
Other (2)
719
551
Total non-interest income
$
4,716
$
4,573
(1) 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.
Revenues recognized in scope of ASC 606:
Deposit account fees: Fees are earned on the Bank's deposit accounts for various products offered to or services performed for the Bank's customers. Fees include business account fees, non-sufficient fund fees, ATM fees and others. These fees are recognized on a daily, monthly or quarterly basis, depending on the type of service.
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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
Card and processing fees: Debit interchange income represents fees earned when a debit card issued by the Bank is used. The Bank earns interchange fees from cardholder transactions through a third party payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders' debit card. Certain expenses directly associated with the debit cards are recorded on a net basis with the interchange income.
Other: Includes asset management fees, 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.
Note 17: Holding Company Condensed Financial Information
This information should be read in conjunction with the other notes to the consolidated financial statements. The following is the Condensed Statements of Financial Condition for Provident Financial Holdings (Holding Company only) as of June 30, 2022 and 2021 and Condensed Statements of Operations and Cash Flows for the fiscal years ended June 30, 2022 and 2021.
Condensed Statements of Financial Condition
June 30,
(In Thousands)
2022
2021
Assets
Cash and cash equivalents
$
3,751
$
5,576
Investment in subsidiary
124,875
121,696
Other assets
61
60
$
128,687
$
127,332
Liabilities and Stockholders’ Equity
Other liabilities
$
37
$
52
Stockholders’ equity
128,650
127,280
$
128,687
$
127,332
Condensed Statements of Operations
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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
Year Ended June 30,
(In Thousands)
2022
2021
Dividend from the Bank
$
7,500
$
5,000
Interest and other income
3
5
Total income
7,503
5,005
General and administrative expenses
1,219
1,117
Earnings before income taxes and equity in undistributed earnings of the Bank
6,284
3,888
Income tax benefit
( 358 )
( 328 )
Earnings before equity in undistributed earnings of the Bank
6,642
4,216
Equity in undistributed earnings of the Bank
2,451
3,345
Net income
$
9,093
$
7,561
Condensed Statements of Cash Flows
Year Ended June 30,
(In Thousands)
2022
2021
Cash flow from operating activities:
Net income
$
9,093
$
7,561
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of the Bank
( 2,451 )
( 3,345 )
(Increase) decrease in other assets
( 1 )
48
Decrease in other liabilities
( 15 )
( 2 )
Net cash provided by operating activities
6,626
4,262
Cash flow from financing activities:
Exercise of stock options
—
981
Treasury stock purchases
( 4,305 )
( 2,336 )
Cash dividends
( 4,146 )
( 4,173 )
Net cash used for financing activities
( 8,451 )
( 5,528 )
Net decrease in cash during the year
( 1,825 )
( 1,266 )
Cash and cash equivalents at beginning of year
5,576
6,842
Cash and cash equivalents at end of year
$
3,751
$
5,576
Note 18: 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
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PROVIDENT FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
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.
Note 19: 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 18, 2022 were entitled to receive the cash dividend, which will be payable on September 8, 2022 .
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