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Item 7. Management’s Discussion and Analysis

2023-09-05 compared with 2022-09-02 · 166 added, 211 removed, 201 unchanged (65% of the section changed)

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Safe-Harbor Statement

Certain matters in this Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

This Form 10-K contains statements that the Corporation believes are “forward-looking statements.” These statements relate to the Corporation’s financial condition, liquidity, results of operations, plans, objectives, future performance or business.

Certain matters discussed in this Form 10-K constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements relate to the Corporation’s financial condition, liquidity, results of operations, plans, objectives, future performance or business.

When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements the Corporation may make.

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

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

potential adverse impacts to economic conditions in our local market areas, other markets where the Corporation has lending relationships, or other aspects of the Corporation's business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia’s invasion of Ukraine, as well as supply chain disruptions;

higher inflation and the impact of current and future monetary policies of the FRB in response thereto;

liquidity issues, including our ability to borrow funds or raise additional capital, if necessary;

the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment;

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

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

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

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

the transition from LIBOR to new interest rate benchmarks;

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

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

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

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

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costs and effects of litigation, including settlements and judgments;

increased competitive pressures among financial services companies;

increased competitive pressures among financial services companies and non-financial services companies;

changes in consumer spending, borrowing and savings habits;

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our ability to pay dividends on our common stock;

adverse changes in the securities markets;

the quality and composition of our securities portfolio and the impact of any adverse changes in the securities markets;

the inability of key third-party providers to perform their obligations to us;

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

war or terrorist activities;

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

Securities and Exchange Commission (“SEC”).

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

the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business;

other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services;

and other risks detailed in this report and in the Corporation’s other reports filed with or furnished to the SEC.

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

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

In light of these risks, uncertainties and

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

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

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

upon the Bank’s conversion completed on June 27, 1996.

The Corporation is regulated by the FRB.

At June 30, 2022, the Corporation had total assets of $1.19 billion, total deposits of $955.5 million and total stockholders’ equity of $128.7 million.

The Corporation has not engaged in any significant activity other than holding the stock of the Bank.

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

These factors could cause our actual results for the fiscal 2024 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us and could negatively affect the Corporation’s consolidated financial condition and consolidated results of operations as well as its stock price performance.

Provident, a Delaware corporation, was organized in January 1996 for the purpose of becoming the holding company of the Bank upon the Bank’s conversion completed on June 27, 1996.

Provident is regulated by the FRB.

At June 30, 2023, the Corporation, on a consolidated basis, had total assets of $1.33 billion, total deposits of $950.6 million and total stockholders’ equity of $129.7 million.

Provident has not engaged in any significant activity other than holding the stock of the Bank.

Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank and its subsidiaries.

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The information contained in this section should be read in conjunction with the audited Consolidated Financial Statements and accompanying selected Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

Critical Accounting Policies

Critical Accounting Estimates

The discussion and analysis of the Corporation’s financial condition and results of operations is based upon the Corporation’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.

The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the consolidated financial statements.

Actual results may differ from these estimates under different assumptions or conditions.

The preparation of these financial statements requires management to make estimates that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the consolidated financial statements.

These estimates involve a significant level of uncertainty at the time they are made, and changes in these estimates that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.

Accordingly, actual results may differ from these estimates under different assumptions or conditions.

We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.

We have reviewed our critical accounting estimates with the audit committee of our Board of Directors.

See Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a summary of significant accounting policies and the effect on our financial statements.

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 held for investment.

Management considers the accounting estimate related to the allowance for loan losses a critical accounting estimate because it is highly susceptible to change from period to period, requiring management to make assumptions about probable incurred losses inherent in the loans held for investment at the date of the Consolidated Statements of Financial Condition.

Management considers the accounting

estimate related to the allowance for loan losses a critical accounting estimate because it is highly susceptible to change from period to period, requiring management to make assumptions about probable incurred losses inherent in the loans held for investment at the date of the Consolidated Statements of Financial Condition.

The impact of a sudden large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings.

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

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

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

A restructured loan is a loan which the Corporation, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Corporation would not otherwise consider.

A restructured loan is a loan which the Bank, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Bank would not otherwise consider.

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

● A reduction in the stated interest rate;

● An extension of the maturity at an interest rate below market;

● A reduction in the accrued interest;

● A reduction in the stated interest rate and/or accrued interest;

● An extension of the maturity date, typically longer than 6 months;

● A reduction in the principal loan balance;

● Extensions, deferrals, renewals and rewrites.

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

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

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

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

Other restructured loans are classified as “Substandard” and placed on non-performing status.

The loans may be upgraded and placed on accrual status once there is a sustained period of payment performance (usually six months or, for loans that have been restructured more than once, 12 months) and there is a reasonable assurance that the payments will continue;

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

longer categorized as a restructured loan.

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

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

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

To qualify for restructuring, a borrower must provide evidence of their creditworthiness such as, current financial statements, their 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 Bank 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.

Interest is not accrued on any loan when its contractual payments are more than 90 days delinquent or if the loan is deemed impaired.

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A loan may be returned to accrual status at such time as the loan is brought fully current as to both principal and interest, and, in management’s judgment, such loan is considered to be fully collectible on a timely basis.

However, the Corporation’s policy also allows management to continue the recognition of interest income on certain non-performing loans.

However, the Bank’s policy also allows management to continue the recognition of interest income on certain non-performing loans.

This is referred to as the cash basis method under which the accrual of interest is suspended and interest income is recognized only when collected.

This policy applies to non-performing loans that are considered to be fully collectible but the timely collection of payments is in doubt.

Provision for Income Taxes.

Management accounts for income taxes by estimating future tax effects of temporary differences between the tax and book basis of assets and liabilities considering the provisions of enacted tax laws.

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As such, changes in management’s subjective assumptions and judgments can materially affect amounts recognized in the Consolidated Statements of Financial Condition and Consolidated Statements of Operations.

Therefore, management considers its accounting for income taxes a critical accounting policy.

Executive Summary and Operating Strategy

Provident Savings Bank, F.S.B., established in 1956, is a financial services company committed to serving consumers and small to mid-sized businesses in the Inland Empire region of Southern California.

The Bank conducts its business operations as Provident Bank and through its subsidiary, Provident Financial Corp.

The Bank conducts its business operations as Provident Bank and through its subsidiary, PFC.

The business activities of the Corporation, primarily through the Bank, consist of community banking and, to a lesser degree, investment services for customers and trustee services on behalf of the Bank.

Community banking operations primarily consist of accepting deposits from customers within the communities surrounding the Corporation’s full service offices and investing those funds in single-family, multi-family and commercial real estate loans.

Also, to a lesser extent, the Corporation makes construction, commercial business, consumer and other mortgage loans.

Community banking operations primarily consist of accepting deposits from customers within the communities surrounding the Bank’s full service offices and investing those funds in single-family, multi-family and commercial real estate loans.

Also, to a lesser extent, the Bank originates construction, commercial business, consumer and other mortgage loans.

The primary source of income in community banking is net interest income, which is the difference between the interest income earned on loans and investment securities, and the interest expense paid on interest-bearing deposits and borrowed funds.

Additionally, certain fees are collected from depositors, such as returned check fees, deposit account service charges, ATM fees, IRA/KEOGH fees, safe deposit box fees, wire transfer fees and overdraft protection fees, among others.

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

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

The Corporation intends to improve its community banking business by moderately increasing total assets by increasing single-family, multi-family, commercial real estate, construction and commercial business loans.

In addition, the Corporation intends to decrease the percentage of retail time deposits in its deposit base and to increase the percentage of lower cost checking and savings accounts and to diversify the deposit instruments, including the use of brokered certificates of deposit and State of California’s time deposits, subject to market conditions and the Corporation’s funding needs.

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

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

While the Corporation’s long-term strategy is for moderate growth, management recognizes that growth may be affected by general economic conditions and other factors.

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

Investment services and trustee services contribute a very small percentage of gross revenue.

Provident Financial Corp performs trustee services for the Bank’s real estate secured loan transactions and has in the past held, and may in the future hold, real estate for investment.

PFC performs trustee services for the Bank’s real estate secured loan transactions and has in the past held, and may in the future hold, real estate for investment.

There are a number of risks associated with the business activities of the Corporation, many of which are beyond the Corporation’s control, including:

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Comparison of Financial Condition at June 30, 2023 and 2022

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

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

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

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

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

Total assets increased $145.9 million, or 12%, to $1.33 billion at June 30, 2023 from $1.19 billion at June 30, 2022.

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

Total cash and cash equivalents, primarily excess cash deposited with the Federal Reserve Bank of San Francisco, increased $42.4 million, or 181%, to $65.8 million at June 30, 2023 from $23.4 million at June 30, 2022.

The increase was consistent with the Corporation’s strategy of adequately managing credit and liquidity risk.

Total investment securities (held to maturity and available for sale) decreased $31.9 million, or 17%, to $156.5 million at June 30, 2023 from $188.4 million at June 30, 2022.

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

The decrease was the result of scheduled and accelerated principal payments on investment securities.

During fiscal 2023, the Bank did not purchase any investment securities, while in fiscal 2022, the Bank purchased $19.0 million of government sponsored enterprise mortgage-backed securities and collateralized mortgage obligations.

The Bank did not sell any investment securities during fiscal 2023 and 2022.

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

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

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

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

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

Loans held for investment, net increased $137.6 million, or 15% to $1.08 billion at June 30, 2023 from $940.0 million at June 30, 2022.

In fiscal 2023, the Bank originated $237.1 million of loans held for investment, down 21% from $299.8 million during fiscal 2022, in both years consisting primarily of single-family, multi-family and commercial real estate loans.

The Bank did not purchase any loans in fiscal 2023 as compared to the purchase of $6.4 million of loans to be held for investment (solely comprised of single-family loans) in fiscal 2022.

Total loan principal payments in fiscal 2023 were $102.3 million, down 54% from $221.3 million in fiscal 2022, due primarily to the mortgage interest rate increases during fiscal 2023.

There was no REO acquired in the settlement of loans in both fiscal 2023 and fiscal 2022.

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

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

million at June 30, 2021.

The balance of multi-family, commercial real estate, construction and commercial business loans, net of undisbursed loan funds, decreased $4.3 million, or 1%, to $555.2 million at June 30, 2023 from $559.5 million at June 30, 2022, and represented 52% and 60% of loans held for investment, respectively.

The balance of single-family loans held for investment increased $140.6 million, or 37%, to $518.8 million at June 30, 2023, from $378.2 million at June 30, 2022.

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

Total deposits increased $17.5 million, or 2%, to $955.5 million at June 30, 2022 from $938.0 million at June 30, 2021.

Transaction accounts increased $36.9 million, or 5%, to $834.4 million at June 30, 2022 from $797.5 million at June 30, 2021;

while time deposits decreased $19.3 million, or 14%, to $121.1 million at June 30, 2022 from $140.4 million at June 30, 2021.

Total deposits decreased $4.9 million, or 1%, to $950.6 million at June 30, 2023 from $955.5 million at June 30, 2022.

Transaction accounts decreased $104.8 million, or 13%, to $729.6 million at June 30, 2023 from $834.4 million at June 30, 2022, while time deposits increased $99.8 million, or 82%, to $220.9 million at June 30, 2023 from $121.1 million at June 30, 2022.

The increase in time deposits was primarily attributable to the utilization of brokered certificates of deposit.

Outstanding brokered certificates of deposit as of June 30, 2023 totaled $106.4 million.

As of June 30, 2023 and 2022, the percentage of transaction accounts to total deposits was 77% and 87%, respectively.

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

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

Noninterest-bearing deposits as a percentage of total deposits decreased to 11% at June 30, 2023 from 13% at June 30, 2022.

Total retail deposits, defined as total deposits excluding brokered certificates of deposit, decreased by $111.3 million, or 12% to $844.2 million at June 30, 2023 from $955.5 million at June 30, 2022, due primarily to the decline of deposit balances related to a number of customers seeking higher interest rates elsewhere.

For additional information on deposits, see Note 6 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

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

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

Borrowings, consisting of FHLB – San Francisco advances increased $150.0 million, or 176%, to $235.0 million at June 30, 2023 from $85.0 million at June 30, 2022.

The increase was primarily due to new advances to fund the increase of loans held for investment.

The weighted-average maturity of the Corporation’s FHLB – San Francisco advances was approximately 12 months at June 30, 2023, down from 16 months at June 30, 2022.

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

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

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

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

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

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

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

Total stockholders’ equity increased $1.0 million or 1% to $129.7 million at June 30, 2023 from $128.7 million at June 30, 2022, primarily as a result of net income and the amortization of stock-based compensation in fiscal 2023, partly offset by stock repurchases (see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Form 10-K) and quarterly cash dividends paid to shareholders.

Comparison of Operating Results for the Fiscal Years Ended June 30, 2023 and 2022

The Corporation recorded net income of $8.6 million, or $1.19 per diluted share, for the fiscal year ended June 30, 2023, down $501,000, or 6%, from $9.1 million, or $1.22 per diluted share, for the fiscal year ended June 30, 2022.

The decrease in net income in fiscal 2023 compared to fiscal 2022 was primarily attributable to a $2.8 million increase in the provision for loan losses as a result of a $374,000 provision for loan losses recorded during fiscal 2023 compared to a $2.5 million recovery from the allowance for loan losses during fiscal 2022, a $2.4 million increase in non-interest expense and a $641,000 decrease in non-interest income, partly offset by a $5.4 million increase in net interest income.

The Corporation's efficiency ratio, defined as non-interest expense divided by the sum of net interest income and non-interest income, improved slightly to 69% in fiscal 2023 from 71% in fiscal 2022 as a result of the increase in net interest income.

Return on average assets in fiscal 2023 decreased to 0.68% from 0.76% in fiscal 2022 and return on average stockholders' equity in fiscal 2023 decreased to 6.58% from 7.14% in fiscal 2022.

Net Interest Income.

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

Net interest income increased $5.4 million, or 17%, to $37.0 million in fiscal 2023 from $31.6 million in fiscal 2022.

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

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

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

The net interest margin increased 27 basis points to 2.99% in fiscal 2023 from 2.72% in fiscal 2022, due primarily to a 73 basis points increase in the average yield on interest-earning assets, partly offset by a 50 basis points increase in the average cost of interest-bearing liabilities.

The average balance of interest-

earning assets increased $75.4 million, or 7%, to $1.24 billion in fiscal 2023 from $1.16 billion in fiscal 2022.

The average balance of interest-bearing liabilities increased $72.2 million, or 7%, to $1.12 billion during fiscal 2023 as compared to $1.05 billion during fiscal 2022.

Interest Income.

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

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

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

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

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

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

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

Total interest income increased $11.3 million, or 33%, to $46.0 million for fiscal 2023 from $34.7 million for fiscal 2022.

The increase was primarily attributable to increases in all interest-earning asset categories, primarily loans receivable.

Interest income on loans receivable increased $10.0 million, or 31%, to $42.2 million in fiscal 2023 from $32.2 million in fiscal 2022.

This increase was attributable to a higher average loan balance and, to a lesser extent, a higher average loan yield.

The average balance of loans receivable increased $158.7 million, or 18%, to $1.03 billion during fiscal 2023 from $870.3 million during fiscal 2022.

The weighted average loan yield during fiscal 2023 increased 40 basis points to 4.10% from 3.70% in fiscal 2022, due primarily to the increase in market interest rates resulting from recent FOMC increases in the targeted federal funds rate since March 2022.

Interest income from investment securities increased $263,000, or 14%, to $2.2 million in fiscal 2023 from $1.9 million in fiscal 2022.

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

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

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

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

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

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

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

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

$8.0 million).

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

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

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

The average yield on investment securities increased 34 basis points to 1.26% for fiscal 2023 from 0.92% for fiscal 2022.

The increase in the average yield of investment securities was primarily attributable to a lower premium amortization resulting from lower principal payments.

Total premium amortization in fiscal 2023 was $791,000, down $760,000, or 49%, from $1.6 million in fiscal 2022.

The average balance of investment securities decreased $34.9 million, or 17%, to $172.0 million in fiscal 2023 from $206.9 million in fiscal 2022 as a result of scheduled and accelerated principal payments on mortgage-backed securities.

During fiscal 2023, the Bank received $556,000 of cash dividends from its FHLB - San Francisco stock, an increase of $67,000 or 14% from the $489,000 of cash dividends received in fiscal 2022, resulting in an average yield of 6.55% on FHLB stock during 2023 compared to 5.98% during 2022.

During fiscal 2023, the Bank purchased $1.3 million of required FHLB - San Francisco stock as a result of its increased borrowings.

Interest income from interest-earning deposits, primarily cash deposited at the Federal Reserve Bank of San Francisco, increased $902,000, or 518%, to $1.1 million in fiscal 2023 from $174,000 in fiscal 2022, due to a higher average yield, partly offset by a lower average balance.

The average yield increased 382 basis points to 4.05% in fiscal 2023 from 0.23% in fiscal 2022, resulting from increases in the targeted federal funds interest rate during fiscal 2023.

Interest Expense.

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

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

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

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

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

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

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

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

The average balance of deposits increased $47.1 million, or 5%, to $961.5 million during fiscal 2022 from $914.4 million during fiscal 2021.

The average balance of transaction accounts increased $70.0 million, or 9%, to $830.0 million in fiscal 2022 from $760.0 million in fiscal 2021.

The average balance of time deposits decreased by $22.9 million, or 15%, to $131.5 million in fiscal 2022 from $154.4 million in fiscal 2021.

The average balance of transaction accounts to total deposits in the fiscal 2022 was 86%, compared to 83% in fiscal 2021.

The increase in the average balance of transaction accounts and the decrease in the average balance of time deposits are consistent with the Bank's marketing strategy to promote transaction accounts and the strategic decision to compete less aggressively on time deposit interest rates.

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

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

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

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

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

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

Total interest expense for fiscal 2023 was $9.0 million compared to $3.1 million for fiscal 2022, an increase of $5.9 million or 187%.

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

The average cost of interest-bearing liabilities was 0.80% during fiscal 2023, up 50 basis point from 0.30% during fiscal 2022, and the average balance of interest-bearing liabilities was $1.12 billion during fiscal 2023, up $72.2 million or 7% from $1.05 billion during fiscal 2022.

Interest expense on deposits for fiscal 2023 was $3.1 million compared to $1.1 million for fiscal 2022, an increase of $2.0 million, or 175%.

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

The average cost of deposits increased 21 basis points to 0.33% in fiscal 2023 from 0.12% in fiscal 2022.

The average cost of transaction accounts remained at 0.05% in fiscal 2023 compared to fiscal 2022, while the average cost of time deposits in fiscal 2023 was 1.70%, up 113 basis points, from 0.57% in fiscal 2022.

The average balance of deposits decreased slightly to $960.9 million during fiscal 2023 from $961.5 million during fiscal 2022.

The average balance of transaction accounts decreased $31.3 million, or 4%, to $798.7 million in fiscal 2023 from $830.0 million in fiscal 2022.

The average balance of time deposits increased by $30.6 million, or 23%, to $162.1 million in fiscal 2023 from $131.5 million in fiscal 2022.

Interest expense on borrowings, consisting of FHLB - San Francisco advances, for fiscal 2023 increased $3.9 million, or 194%, to $5.9 million as compared to $2.0 million in fiscal 2022.

The increase in interest expense on borrowings was due to a higher average balance and a higher average cost.

The average balance of borrowings increased $72.8 million, or 84%,

to $159.7 million during fiscal 2023 from $86.9 million during fiscal 2022.

The average cost of borrowings was 3.67% in fiscal 2023, up 138 basis points from 2.29% in fiscal 2022.

Provision (Recovery) for Loan Losses.

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

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

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

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

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

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

During fiscal 2023, the Corporation recorded a provision for loan losses of $374,000, compared to a recovery from the allowance for loan losses of $2.5 million during fiscal 2022.

The provision reflected in fiscal 2023 was primarily due to a higher outstanding balance of loans held for investment, while the recovery from the allowance for loan losses in fiscal 2022 was primarily due to an improvement in the qualitative component adjustment to the allowance for loan losses reflecting improved general economic conditions and recoveries from the allowance for loan losses from non-performing loans and classified loans that were upgraded or paid off, partly offset by an increase in loans held for investment.

Non-performing assets, comprised solely of non-performing loans (net of the collectively evaluated allowances and individually evaluated allowances) during fiscal 2023 and fiscal 2022, was $1.3 million at June 30, 2023, down $123,000 or 9% from $1.4 million at June 30, 2022.

Non-performing loans at June 30, 2023 were comprised of six single-family loans on non-accrual.

As of June 30, 2023, $175,000 or 13% of the non-performing loans have a current payment status.

Net loan recoveries in fiscal 2023 were $8,000 or 0.00% of average loans receivable, compared to net loan recoveries of $439,000 or 0.05% of average loans receivable in fiscal 2022.

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

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

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

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

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

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

three loans were upgraded to the pass category;

seven loans were paid off;

and no loans were converted to real estate owned.

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

two loans were upgraded to the pass category;

three loans were paid off;

and no loans were converted to real estate owned.

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

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

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

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

The allowance for loan losses was $5.6 million at June 30, 2022, or 0.59% of gross loans held for investment, compared to $7.6 million, or 0.88% of gross loans held for investment at June 30, 2021.

The allowance for loan losses at June 30, 2022 includes $38,000 of individually evaluated allowances, compared to $384,000 of individually evaluated allowances at June 30, 2021.

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

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

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 portfolio 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.

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

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

loans held for investment, will not request the Bank to significantly increase its allowance for loan losses.

Future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly and adversely affected as a result of economic, operating, regulatory and other conditions beyond the control of the Bank, including as a result of the COVID-19 pandemic.

At both June 30, 2023 and June 30, 2022, there was no REO or accruing loans 90 days or more past due.

Management believes, based on currently available information, the allowance for loan losses is sufficient to absorb potential losses inherent in loans held for investment at June 30, 2023 under the incurred loss methodology.

Commencing July 1, 2023, the Corporation will be calculating its allowance for credit losses on loans in accordance with the CECL methodology.

For additional information, see Item 1, “Business - “Asset Quality” in this Form 10-K.

Non-Interest Income.

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

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

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

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

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

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

Total non-interest income was $4.1 million in fiscal 2023, a decrease of $641,000 or 14% from $4.7 million in fiscal 2022, primarily attributable to a decrease in loan servicing and other fees.

Loan servicing and other fees decreased $642,000, or 61%, to $414,000 for fiscal 2023 from $1.1 million in fiscal 2022, due primarily to lower loan prepayment fees, attributable to lower loan payoffs.

Non-Interest Expense.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Total non-interest expense was $28.3 million in fiscal 2023, an increase of $2.4 million or 9% from $25.9 million in fiscal 2022.

The increase in non-interest expense was primarily attributable to increases in salaries and employee benefits and premises and occupancy expenses.

Salaries and employee benefits expense increased $1.9 million, or 12%, to $17.7 million in fiscal 2023 from $15.8 million in fiscal 2022.

The increase in salaries and employee benefits expense was primarily due to a $1.2 million Employee Retention Tax Credit (“ERTC”) recorded in fiscal 2022 and not replicated in fiscal 2023, a $1.0 million increase in incentive compensation, a $387,000 increase in stock-based compensation resulting from the true-up adjustments associated with the vesting of the equity incentive awards, a $350,000 decrease in deferred loan fees recoveries (ASC 310), partly offset by a $1.3 million recovery from the Bank’s obligations for the supplemental executive retirement plans.

Premises and occupancy expense increased $258,000, or 8%, to $3.4 million in fiscal 2023 from $3.2 million in fiscal 2022.

The increase was due primarily to higher network services expenses, attributable to a refund of $136,000 in fiscal 2022 from a vendor on previously paid network services invoices that were overstated when paid and not replicated in fiscal 2023 and higher network services expenses in fiscal 2023 resulting from network upgrades.

Provision for Income Taxes.

The income tax provision reflects accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income, adjusted for the effect of all permanent differences between income for tax and financial reporting purposes, such as non-deductible stock-based compensation, bank-owned life insurance policies and certain California tax-exempt loans, among others.

The income tax provision reflects accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income, adjusted for the effect of all permanent differences between income for tax and financial reporting purposes, such as non-deductible stock-based compensation and bank-owned life insurance policies, among others.

Therefore, there are fluctuations in the effective income tax rate from period to period based on the relationship of net permanent differences to income before tax.

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

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

The provision for income taxes was $3.8 million for fiscal 2023, representing an effective tax rate of 30.8%, similar to $3.8 million in fiscal 2022, representing an effective tax rate of 29.3%.

The higher effective tax rate in fiscal 2023 was attributable primarily to a decrease in the tax benefit realized from the equity incentive awards with the share price lower

at vesting and distribution than the fair value estimated on the grant date, while the effective tax rate in fiscal 2022 was impacted by the non-taxable treatment of the lower ERTC for state tax purposes (not replicated in fiscal 2023).

The Corporation’s effective tax rate may differ from the estimated tax rates described above due to discrete items such as further adjustments to net deferred tax assets, excess tax benefits derived from stock option exercises and non-taxable earnings from bank owned life insurance, among other items.

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Total interest-earning assets

Non interest-earning assets

Noninterest-earning assets

Interest-bearing liabilities:

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Total interest-bearing liabilities

Non interest-bearing liabilities

Noninterest-bearing liabilities

Total liabilities

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

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

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

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

(1) Includes non-performing loans of $1.1 million and $4.2 million, as well as net deferred loan costs of $959 thousand and $1.8 million for the fiscal years ended June 30, 2023 and 2022, respectively.

(2) Includes the average balance of noninterest-bearing checking accounts of $112.9 million and $119.5 million in the fiscal years ended June 30, 2023 and 2022, respectively.

(3) Includes the average balance of uninsured deposits of $170.2 million and $169.2 million in the fiscal years ended June 30, 2023 and 2022, respectively.

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

1 unchanged sentence

Rate/Volume Variance

The following tables set forth the effects of changing rates and volumes on interest income and expense of the Corporation for the period presented.

Information is provided with respect to the effects attributable to changes in volume (changes in volume multiplied by prior rate), the effects attributable to changes in rate (changes in rate multiplied by prior volume) and the effects attributable to changes that cannot be allocated between rate and volume.

The following table sets forth the effects of changing rates and volumes on interest income and expense of the Corporation for the period presented.

Information is provided with respect to the effects attributable to changes in volume (changes in

volume multiplied by prior rate), the effects attributable to changes in rate (changes in rate multiplied by prior volume) and the effects attributable to changes that cannot be allocated between rate and volume.

Year Ended June 30, 2023 Compared

13 unchanged sentences

Total net change in expense on interest-bearing liabilities

Net (decrease) increase in net interest income

(1) Includes non-performing loans.

For purposes of calculating volume, rate and rate/volume variances, non-performing loans were included in the weighted-average balance outstanding.

Year Ended June 30, 2021 Compared

To Year Ended June 30, 2020

Increase (Decrease) Due to

(In Thousands)

Interest-earning assets:

Loans receivable (1)

Investment securities

FHLB – San Francisco stock

Interest-earning deposits

Total net change in income on interest-earning assets

Interest-bearing liabilities:

Checking and money market accounts

Savings accounts

Time deposits

Total net change in expense on interest-bearing liabilities

Net (decrease) increase in net interest income

Net increase (decrease) in net interest income

(1) Includes non-performing loans.

1 unchanged sentence

Liquidity and Capital Resources

The Corporation's primary sources of funds are deposits, proceeds from principal and interest payments on loans, proceeds from the maturity and sale of investment securities, proceeds from FHLB - San Francisco advances, and access to the discount window facility at the Federal Reserve Bank of San Francisco.

The Corporation's primary sources of funds are deposits, proceeds from principal and interest payments on loans, proceeds from the maturity and sale of investment securities, proceeds from FHLB - San Francisco advances, access to the discount window facility at the Federal Reserve Bank of San Francisco and access to the correspondent bank’s federal funds facility.

While maturities and scheduled amortization of loans and investment securities are a relatively predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

1 unchanged sentence

During the fiscal years ended June 30, 2023 and 2022, the Bank originated loans held for investment of $237.1 million and $299.8 million, respectively.

In addition, the Bank purchased loans held for investment from other financial institutions in fiscal 2022 and 2021 of $6.4 million and $16.9 million, respectively.

At June 30, 2022 and 2021, the Bank had loan origination commitments totaling $43.4 million and $21.9 million, respectively, with undisbursed loan funds of $3.4 million and $4.5 million, respectively.

In addition, the Bank purchased loans held for investment from other financial institutions in fiscal 2023 and fiscal 2022 of $0 and $6.4 million, respectively.

At June 30, 2023 and 2022, the Bank had loan origination commitments totaling $2.4 million and $43.4 million, with undisbursed loan funds of $2.0 million and $3.4 million, respectively.

The Bank anticipates that it will have sufficient funds available to meet its current loan origination commitments.

The Bank's primary financing activity is gathering deposits.

During the fiscal years ended June 30, 2022 and 2021, the net increase in deposits was $17.5 million and $45.0 million, respectively.

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

During the fiscal years ended June 30, 2023 and 2022, the net (decrease) increase in deposits was $(4.9 million) and $17.5 million, respectively.

On June 30, 2023, time deposits scheduled to mature in one year or less were $166.5 million.

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

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Depending on market conditions and the pricing of deposit products and FHLB - San Francisco advances, the Bank may continue to rely on FHLB - San Francisco advances for part of its liquidity needs.

As of June 30, 2022, the remaining financing availability at FHLB - San Francisco was $310.3 million and the remaining available collateral was $310.5 million.

In addition, the Bank has secured a $153.9 million discount window facility at the Federal Reserve Bank of San Francisco, collateralized by investment securities with a fair market value of $163.7 million.

The Bank also has a federal funds facility with its correspondent bank for $50.0 million which matures on June 30, 2023.

As of June 30, 2023, the remaining financing availability at the FHLB - San Francisco was $287.9 million and the remaining available collateral was $468.6 million.

In addition, the Bank has secured a $139.0 million discount window facility at the Federal Reserve Bank of San Francisco, collateralized by investment securities.

also has a federal funds facility with its correspondent bank for $50.0 million which matures on June 30, 2024.

As of June 30, 2023, there were no outstanding borrowings under the discount window facility or the federal funds facility with its correspondent bank.

The total available borrowing capacity across all sources totals approximately $476.9 million at June 30, 2023.

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

The Bank's average liquidity ratio (defined as the ratio of average qualifying liquid assets to average deposits and borrowings) for the quarter ended June 30, 2023 decreased to 18.1% from 24.3% during the same quarter ended June 30, 2022.

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

The decrease in the liquidity ratio was due primarily to the decrease in average qualifying liquid assets and the increase in average borrowings during the quarter ended June 30, 2023 in comparison to the quarter ended June 30, 2022.

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

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

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

Based on our current capital allocation objectives, during fiscal 2024 we project expending approximately $1.8 million to $2.7 million for capital investment in property, plant and equipment.

For additional information regarding our commitments, see Note 13, "Commitments and Contingencies,"

of the Notes to Consolidated Financial Statements, contained in Item 8 of this Form 10-K.

Provident is a separate legal entity from the Bank and, on a stand-alone level, must provide for its own liquidity and pay its own operating expenses and cash dividends and stock repurchases.

Provident’s primary sources of funds consist of capital raised through dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends.

During fiscal 2023, the Corporation purchased 302,719 shares of the Corporation’s common stock with a weighted average cost of $14.01 per share.

As of June 30, 2023, there are 61,540 shares available for purchase under the Corporation’s existing stock repurchase plan.

The Corporation purchases the shares from time to time in the open market or through privately negotiated transactions depending on market conditions, the capital requirements of the Corporation, and available cash that can be allocated to the stock repurchase program, among other considerations.

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

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

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

Our current quarterly common stock dividend rate is $0.14 per share, as approved by our Board of Directors, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank, and returning a substantial portion of our cash to our shareholders.

Assuming continued payment during fiscal 2024 at this rate of $0.14 per share, our average total dividend paid each quarter would be approximately $986,000 based on the number of our current outstanding shares as of June 30, 2023.

At June 30, 2023, Provident (on an unconsolidated basis) had liquid assets of approximately $3.7 million.

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

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In addition, Provident Financial Holdings, Inc., as a savings and loan holding company registered with the FRB, is required by the FRB to maintain capital adequacy that generally parallels the OCC requirements.

Since the holding company has less than $3.0 billion in assets, the capital guidelines apply on a bank only basis, and the Federal Reserve expects the holding company’s subsidiary bank to be well capitalized under the prompt corrective action regulations.

Since the holding company has less than $3.0 billion in assets, the capital guidelines apply on a bank only basis, and the FRB expects the holding company’s subsidiary bank to be well capitalized under the prompt corrective action regulations.

At June 30, 2023, the Bank exceeded all regulatory capital requirements.

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

Under the prompt corrective action provisions, minimum ratios of 5.0% for Tier 1 Leverage Capital, 6.5% for CET1 Capital, 8.0% for Tier 1 Risk-based Capital and

10.0% for Total Risk-based Capital are required to be deemed “well capitalized.” As of June 30, 2023, the Bank exceeded the capital ratios needed to be considered well capitalized with Tier 1 Leverage Capital, CET1 Capital, Tier 1 Risk-based Capital and Total Risk-based Capital ratios of 9.6%, 18.5%, 18.5% and 19.4%, respectively.

See also, “Regulation – Federal Regulation of Savings Institutions – Capital Requirements” and Note 9, "Capital"

of the Notes to Consolidated Financial Statements contained in Items 1 and 8 of this Form 10-K, respectively.

Impact of New Accounting Pronouncements

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In particular, management has identified several accounting policies that, as a result of the judgments, estimates and assumptions inherent in those policies, are important to gain an understanding of the financial statements of the Corporation.

These policies relate to the methodology for the recognition of interest income, determination of the provision and allowance for loan losses, the estimated fair value of derivative financial instruments and the valuation of mortgage servicing rights and real estate owned.

These policies and judgments, estimates and assumptions are described in greater detail in this Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations"

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

What changed 10-K

Item 7. Management’s Discussion and Analysis