Provident Financial (PROV) 10-K 2021 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

☒        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2021             OR

☐        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-28304

PROVIDENT FINANCIAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware	33-0704889
(State or other jurisdiction of incorporation	(I.R.S. Employer
or organization)	Identification  Number)
3756 Central Avenue, Riverside, California	92506
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:    (951) 686-6060

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $.01 per share	PROV	The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

☐ Yes ☒ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

☐ Yes ☒ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). ☐ Yes ☒ No

The aggregate market value of the common stock held by non affiliates of the registrant, based on the closing sales price of the registrant’s common stock as quoted on the NASDAQ Global Select Market on December 31, 2020, was $106.1 million. As of August 31, 2021, there were 7,515,795 shares of the registrant’s common stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the Annual Report to Shareholders are incorporated by reference into Part II.

2. Portions of the definitive Proxy Statement for the fiscal 2021 Annual Meeting of Shareholders (“Proxy Statement”) are incorporated by reference into Part III.

PROVIDENT FINANCIAL HOLDINGS, INC.

Table of Contents

		Page
PART I
Item 1.	Business:	1
	General	1
	Subsequent Events	2
	Market Area	2
	Competition	2
	Reportable Segments	2
	Internet Website	2
	Lending Activities	3
	Loan Servicing	11
	Delinquencies and Classified Assets	12
	Investment Securities Activities	18
	Deposit Activities and Other Sources of Funds	19
	Subsidiary Activities	23
	Regulation	24
	Taxation	31
	Employees and Human Capital	32
	Executive Officers	34
Item 1A.	Risk Factors	35
Item 1B.	Unresolved Staff Comments	47
Item 2.	Properties	47
Item 3.	Legal Proceedings	47
Item 4.	Mine Safety Disclosures	47
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	47
Item 6.	Selected Financial Data	49
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations:	50
	General	51
	Critical Accounting Policies	51
	Executive Summary and Operating Strategy	53
	COVID-19 Impact to the Corporation	54
	Off-Balance Sheet Financing Arrangements	55
	Comparison of Financial Condition at June 30, 2021 and 2020	56
	Comparison of Operating Results for the Years Ended June 30, 2021 and 2020	57
	Average Balances, Interest and Average Yields/Costs	61
	Rate/Volume Variance	62
	Liquidity and Capital Resources	63
	Impact of Inflation and Changing Prices	64
	Impact of New Accounting Pronouncements	64
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	64
Item 8.	Financial Statements and Supplementary Data	68
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	68
Item 9A.	Controls and Procedures	68
Item 9B.	Other Information	70
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	70
Item 11.	Executive Compensation	70
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	71
Item 13.	Certain Relationships and Related Transactions, and Director Independence	72
Item 14.	Principal Accountant Fees and Services	72
PART IV
Item 15.	Exhibits, Financial Statement Schedules	72
Signatures		75

As used in this report, the terms “we,” “our,” “us,” and “Provident” refer to Provident Financial Holdings, Inc. and its consolidated subsidiaries, unless the context indicates otherwise. When we refer to the “Bank” or “Provident Savings Bank” in this report, we are referring to Provident Savings Bank, F.S.B., a wholly owned subsidiary of Provident Financial Holdings, Inc.

PART I

Item 1.  Business

General

Provident Financial Holdings, Inc. (the “Corporation”), a Delaware corporation, was organized in January 1996 for the purpose of becoming the holding company of Provident Savings Bank, F.S.B. (the “Bank”) upon the Bank’s conversion from a federal mutual to a federal stock savings bank (“Conversion”). The Conversion was completed on June 27, 1996.  The Corporation is regulated by the Federal Reserve Board (“FRB”).  At June 30, 2021, the Corporation had consolidated total assets of $1.18 billion, total deposits of $938.0 million and stockholders’ equity of $127.3 million. The Corporation has not engaged in any significant activity other than holding the stock of the Bank.  Accordingly, the information set forth in this Annual Report on Form 10-K (“Form 10-K”), including the audited consolidated financial statements and related data, relates primarily to the Bank.

The Bank, founded in 1956, is a federally chartered stock savings bank headquartered in Riverside, California. The Bank is regulated by the Office of the Comptroller of the Currency (“OCC”), its primary federal regulator, and the Federal Deposit Insurance Corporation (“FDIC”), the insurer of its deposits.  The Bank’s deposits are federally insured up to applicable limits by the FDIC.  The Bank has been a member of the Federal Home Loan Bank (“FHLB”) – San Francisco since 1956.

The Bank 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 business activities of the Bank consist of community banking, investment services and trustee services for real estate transactions.

The Bank’s community banking operations primarily consist of accepting deposits from customers within the communities surrounding its full service offices and investing those funds in single-family, multi-family, commercial real estate, construction, commercial business, consumer and other mortgage loans. Through its subsidiary, Provident Financial Corp, the Bank conducts trustee services for the Bank’s real estate transactions and in the past has held real estate for investment. For additional information, see “Subsidiary Activities” in this Form 10-K. The activities of Provident Financial Corp are included in the Bank's operating segment results.  The Bank’s revenues are derived principally from interest earned on its loan and investment portfolios, and fees generated through its community banking activities.

On June 22, 2006, the Bank established the Provident Savings Bank Charitable Foundation (“Foundation”) in order to further its commitment to the local community. The specific purpose of the Foundation is to promote and provide for the betterment of youth, education, housing and the arts in the Bank’s primary market areas of Riverside and San Bernardino counties. The Foundation was funded with a $500,000 charitable contribution made by the Bank in the fourth quarter of fiscal 2006. The Bank contributed $40,000 to the Foundation in both fiscal 2021 and 2020.

Since the novel coronavirus of 2019 (“COVID-19”) was declared a pandemic in March 2020, COVID-19 has significantly affected our communities, customers, and operations. Efforts to limit the spread of COVID-19 led to shelter-in-place orders, the temporary closure of non-essential businesses, travel restrictions, supply chain disruptions and prohibitions on public gatherings, among other things, throughout many parts of the United States and, in particular, the markets in which we operate. Although many of these restrictions have been lifted and society has begun to re-open, the COVID-19 pandemic is ongoing and additional uncertainties exist which may continue to impact our customers, employees and vendors; the financial services and banking industry; and the economy as a whole. These uncertainties include, among other things, the extent and severity of the spread of COVID-19 including COVID-19 variants, the length of the outbreak, the extent of distribution and efficacy of vaccines, the extent of lifting of pandemic-related restrictions including social distancing and the use of facemasks, and future actions taken by governmental authorities to contain the outbreak or to mitigate its impact. In light of the uncertainties and continuing developments related the COVID-19 pandemic, the ultimate adverse impact of COVID-19 cannot be reliably estimated at this time, but it has been and is expected to continue to be material.

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Subsequent Event:

On July 22, 2021, the Corporation announced that the Corporation’s Board of Directors declared a cash dividend of $0.14 per share.  Shareholders of the Corporation’s common stock at the close of business on August 12, 2021 were entitled to receive the cash dividend, which was paid on September 2, 2021.

Market Area

The Bank is headquartered in Riverside, California and operates 12 full-service banking offices in Riverside County and one full-service banking office in San Bernardino County. Management considers Riverside and Western San Bernardino counties to be the Bank’s primary market for deposits. The Bank is the largest independent community bank headquartered in Riverside County and it has the tenth largest deposit market share of all banks and the second largest of community banks in Riverside County.

The large geographic area encompassing Riverside and San Bernardino counties is referred to as the “Inland Empire.” According to the 2020 Census Bureau population statistics, Riverside and San Bernardino Counties have the fourth and fifth largest populations in California, respectively. The Bank’s market area consists primarily of suburban and urban communities. Riverside and Western San Bernardino counties are relatively densely populated and are within the greater Los Angeles metropolitan area. According to the United States of America (“U.S.”) Department of Labor, Bureau of Labor Statistics, the unemployment rate for both the Inland Empire and the State of California in June 2021 was 7.9%, compared to 5.9% nationwide. This elevated level of unemployment rate was due primarily to the impact of the COVID-19 pandemic, although it was much lower as compared to the unemployment data reported in June 2020, which was 13.3% in the Inland Empire, 14.1% in California and 11.1% nationwide. Recent forecasts suggest that the Inland Empire economy is regaining 62,400 jobs in calendar 2021, up 4.15% from 2020. The job gain is expected to be due to the reopening of businesses in the food and beverages, retail, hotel and entertainment sectors as well as growth in logistics, construction and health care. Assuming this job growth, the Inland Empire job level would be at 1,564,300 jobs or just 3,200 jobs or 0.2 percent below its level at the end of 2019 (Source: Inland Empire Quarterly Economic Report - May 2021).

California home sales in June 2021 were up 28.3% percent from a year ago, when 339,910 homes were sold on an annualized basis. The June 2021 statewide and Inland Empire median home price was $819,630 and $525,000, up 30.9% and 28% from June 2020, respectively. (Source: California Association of Realtors – July 16, 2021 News Release).

Competition

The Bank faces significant competition in its market area in originating real estate loans and attracting deposits. The population growth in the Inland Empire has attracted numerous financial institutions to the Bank’s market area. The Bank’s primary competitors are large national and regional commercial banks as well as other community-oriented banks and savings institutions. The Bank also faces competition from credit unions and a large number of mortgage companies that operate within its market area, as well as unregulated or less regulated non-banking entities, operating locally and elsewhere. Many of these institutions are significantly larger than the Bank and therefore have greater financial and marketing resources than the Bank. This competition may limit the Bank’s growth and profitability in the future.

Reportable Segments

Management monitors the revenue and expense components of the various products and services the Bank offers, but operations are managed and financial performance is evaluated on a Corporation-wide basis in comparison to a business plan which is developed each year. Accordingly, all operations are considered by management to be one operating segment and one reportable segment as contained in the Consolidated Statements of Operations to the Corporation’s audited consolidated financial statements included in Item 8 of this Form 10-K.

Internet Website

The Corporation maintains a website at www.myprovident.com. The information contained on that website is not included as a part of, or incorporated by reference into, this Form 10-K. Other than an investor’s own internet access charges, the Corporation makes available free of charge through that website the Corporation’s annual report, quarterly reports on Form

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10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after these materials have been electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”).  In addition, the SEC maintains a website that contains reports, proxy and information statements, and other information regarding companies that file electronically with the SEC. This information is available at www.sec.gov.

Lending Activities

General.  The lending activity of the Bank is comprised of the origination of single-family, multi-family and commercial real estate loans and, to a lesser extent, construction, commercial business, consumer and other mortgage loans to be held for investment. Additional lending activities have included originating saleable single-family loans, primarily fixed-rate first trust deed mortgages. The Bank’s net loans held for investment were $851.0 million at June 30, 2021, representing 71.9% of consolidated total assets. This compares to $902.8 million, or 76.7% of consolidated total assets, at June 30, 2020.

At June 30, 2021, the maximum amount that the Bank could have loaned to any one borrower and the borrower’s related entities under applicable regulations was $19.4 million, or 15% of the Bank’s unimpaired capital and surplus. At June 30, 2021, the Bank had no loans or group of loans to related borrowers with outstanding balances in excess of this amount.  The Bank’s five largest lending relationships at June 30, 2021 consisted of: four multi-family loans totaling $5.3 million to one group of borrowers; eight single-family loans and one multi-family loan totaling $5.3 million to one group of borrowers; two multi-family loans totaling $4.5 million to one group of borrowers; one multi-family loan totaling $4.3 million to one group of borrowers; and one multi-family loan and one commercial real estate loan totaling $4.3 million to one group of borrowers.  The real estate collateral for these loans is located in Southern and Northern California.  At June 30, 2021, all of these loans were performing in accordance with their repayment terms.

Loans Held For Investment Analysis.  The following table sets forth the composition of the Bank’s loans held for investment at the dates indicated:

	At June 30,
	2021				2020				2019				2018				2017
(Dollars In Thousands)	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Mortgage loans:
Single-family	$	268,272	31.48	%	$	298,810	33.04	%	$	324,952	36.87	%	$	314,808	34.80	%	$	322,197	35.51	%
Multi-family		484,408	56.85			491,903	54.38			439,041	49.81			476,008	52.63			479,959	52.89
Commercial real estate		95,279	11.18			105,235	11.64			111,928	12.70			109,726	12.13			97,562	10.75
Construction		3,040	0.36			7,801	0.86			4,638	0.53			3,174	0.35			6,994	0.77
Other		139	0.02			143	0.02			167	0.02			167	0.02			—	—
Total mortgage loans		851,138	99.89			903,892	99.94			880,726	99.93			903,883	99.93			906,712	99.92
Commercial business loans		849	0.10			480	0.05			478	0.05			500	0.06			576	0.07
Consumer loans		95	0.01			94	0.01			134	0.02			109	0.01			129	0.01
Total loans held for investment, gross		852,082	100.00	%		904,466	100.00	%		881,338	100.00	%		904,492	100.00	%		907,417	100.00	%
Advance payments of escrows		157				68				53				18				61
Deferred loan costs, net		6,308				6,527				5,610				5,560				5,480
Allowance for loan losses		(7,587)				(8,265)				(7,076)				(7,385)				(8,039)
Total loans held for investment, net	$	850,960			$	902,796			$	879,925			$	902,685			$	904,919

Maturity of Loans Held for Investment. The following table sets forth information at June 30, 2021 regarding the dollar amount of principal payments becoming contractually due during the periods indicated for loans held for investment. Demand loans, loans having no stated schedule of principal payments, loans having no stated maturity, and overdrafts are reported as becoming due within one year. The table does not include any estimate of prepayments, which can significantly

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shorten the average life of loans held for investment and may cause the Bank’s actual principal payment experience to differ materially from that shown below:

			After		After		After
			One Year		3 Years		5 Years
	Within		Through		Through		Through		Beyond
(In Thousands)	One Year		3 Years		5 Years		10 Years		10 Years		Total
Mortgage loans:
Single-family	$	146	$	674	$	405	$	3,565	$	263,482	$	268,272
Multi-family		—		—		—		24,769		459,639		484,408
Commercial real estate		1,798		7,108		19,927		57,664		8,782		95,279
Construction		2,761		—		—		—		279		3,040
Other		139		—		—		—		—		139
Commercial business loans		565		10		—		274		—		849
Consumer loans		95		—		—		—		—		95
Total loans held for investment, gross	$	5,504	$	7,792	$	20,332	$	86,272	$	732,182	$	852,082

The following table sets forth the dollar amount of all loans held for investment due after one year from June 30, 2021 which have fixed and floating or adjustable interest rates:

					Floating or
					Adjustable
(Dollars In Thousands)	Fixed-Rate		%	(1) ​	Rate		%	(1) ​
Mortgage loans:
Single-family	$	32,100	12	%	$	236,026	88	%
Multi-family		219	—	%		484,189	100	%
Commercial real estate		153	—	%		93,328	100	%
Construction		30	11	%		249	89	%
Commercial business loans		284	100	%		—	—	%
Total loans held for investment, gross	$	32,786	4	%	$	813,792	96	%

(1) As a percentage of each category.

Scheduled contractual principal payments of loans do not reflect the actual life of such assets. The average life of loans is generally substantially less than their contractual terms because of prepayments. In addition, due-on-sale clauses generally give the Bank the right to declare loans immediately due and payable in the event, among other things, the borrower sells the real property that secures the loan. The average life of mortgage loans tends to increase, however, when current market interest rates are substantially higher than the interest rates on existing loans held for investment and, conversely, decrease when the interest rates on existing loans held for investment are substantially lower than current market interest rates, as borrowers are generally less inclined to refinance their loans when market rates increase and more inclined to refinance their loans when market rates decrease.

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The table below describes the geographic dispersion of real estate secured loans held for investment (gross) at June 30, 2021 and 2020, as a percentage of the total dollar amount outstanding (dollars in thousands):

As of June 30, 2021:

	Inland				Southern				Other				Other
	Empire				California(1)				California				States				Total
Loan Category	Balance		%		Balance		%		Balance		%		Balance		%		Balance		%
Single-family	$	78,631	29	%	$	100,560	38	%	$	88,790	33	%	$	291	—	%	$	268,272	100	%
Multi-family		68,350	14	%		304,534	63	%		111,232	23	%		292	—	%		484,408	100	%
Commercial real estate		22,989	24	%		41,940	44	%		30,350	32	%		—	—	%		95,279	100	%
Construction		279	9	%		2,761	91	%		—	—	%		—	—	%		3,040	100	%
Other		—	—	%		139	100	%		—	—	%		—	—	%		139	100	%
Total	$	170,249	20	%	$	449,934	53	%	$	230,372	27	%	$	583	—	%	$	851,138	100	%

(1) Other than the Inland Empire.

As of June 30, 2020:

	Inland				Southern				Other				Other
	Empire				California(1)				California				States				Total
Loan Category	Balance		%		Balance		%		Balance		%		Balance		%		Balance		%
Single-family	$	82,019	28	%	$	140,888	47	%	$	75,372	25	%	$	531	—	%	$	298,810	100	%
Multi-family		66,427	14	%		321,556	65	%		103,609	21	%		311	—	%		491,903	100	%
Commercial real estate		23,501	22	%		47,484	45	%		34,250	33	%		—	—	%		105,235	100	%
Construction		1,115	14	%		5,190	67	%		1,496	19	%		—	—	%		7,801	100	%
Other		—	—	%		143	100	%		—	—	%		—	—	%		143	100	%
Total	$	173,062	19	%	$	515,261	57	%	$	214,727	24	%	$	842	—	%	$	903,892	100	%

(1) Other than the Inland Empire.

Single-Family Mortgage Loans.  One of the Bank’s primary lending activity is the origination and purchase of adjustable and fixed rate mortgage loans to be held for investment secured by first trust deed mortgages on owner-occupied, single-family (one to four units) residences in the communities where the Bank’s branches are located and surrounding areas in Southern and Northern California.  During fiscal 2021 the Bank originated $120.7 million and purchased $5.4 million of single-family loans to be held for investment, all of which were underwritten in accordance with the Bank’s origination guidelines. This compares to single-family loan originations of $36.4 million and purchases of $70.7 million during fiscal 2020. At June 30, 2021, total single-family loans held for investment decreased 10% to $268.3 million, or 31.5% of the total loans held for investment, from $298.8 million, or 33.0% of the total loans held for investment, at June 30, 2020. The decrease in the single-family loans in fiscal 2021 was primarily attributable to loan principal payments that exceeded new loans originated and purchased for investment. During fiscal 2021, the Bank had net recoveries of $31,000 in non-performing single-family loans, as compared to net recoveries of $69,000 during fiscal 2020. At June 30, 2021 and 2020, total non-performing single-family loans were $7.9 million and $4.9 million, net of allowances and charge-offs, and $0 and $219,000 were past due 30 to 89 days, respectively.

The Bank has underwriting standards that generally conform with the standards of the governmental sponsored entities (“GSE”) which include Fannie Mae and Freddie Mac. Mortgage insurance is usually required for all loans exceeding 80% loan-to-value (“LTV”) based on the lower of the purchase price or appraised value at the time of loan origination.  The Bank is not currently offering loans with LTV ratios greater than 90%. The ratio is derived by dividing the original loan balance by the lower of the original appraised value or purchase price of the real estate collateral. Currently, the maximum LTV ratio is 90% for purchase and rate and term refinances and 75% for cash-out refinances. The maximum loan amount offered is $1.5 million.  The lowest FICO score currently offered is 690 for a purchase transaction and 720 for a cash-out transaction. The FICO score represents the creditworthiness of a borrower based on the borrower’s credit history, as

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reported by an independent third party. A higher FICO score indicates a greater degree of creditworthiness. Bank regulators have issued guidance stating that a FICO score of 660 and below is indicative of a “subprime” borrower. The Bank currently lends on residential properties classified as single-family unit, planned unit developments and condominiums. Underwriting standards and guidelines may change at any time given changes in real estate market conditions or changes to GSE policies and guidelines. For additional protection, the Bank purchases lender-paid mortgage insurance for certain single-family mortgage loans. As of June 30, 2021, a total of $55.7 million of single-family mortgage loans with an 78% weighted average LTV at the time of origination have lender-paid mortgage insurance providing a weighted average coverage ratio of 11% of the original loan amount.

The Bank currently offers closed-end, fixed-rate home equity loans that are secured by the borrower’s primary residence. These loans do not exceed 75% of the appraised value of the residence and have terms of 30 years requiring monthly payments of principal and interest. At June 30, 2021, home equity loans amounted to $2.8 million or 1.0% of single-family loans held for investment, as compared to $5.3 million or 1.8% of single-family loans held for investment at June 30, 2020.

The Bank currently offers fixed rate loan products in Riverside and San Bernardino counties and adjustable rate mortgage (“ARM”) loans throughout California. Substantially all of the loans originated by the Bank meet GSE underwriting standards based on credit and collateral. The Bank offers several ARM products which adjust semi-annually after an initial fixed period ranging from five to ten years subject to a limitation on semi-annual and lifetime changes.  Currently, the ARM programs have a rate consisting of an Index tied to the Secured Overnight Financing Rate (“SOFR”), plus a margin. The programs are limited to a maximum, semi-annual increase or decrease of one percentage point with a maximum lifetime increase of five percentage points.  The rate may not fall below the margin. The portfolio currently consists of the following indexes, plus a margin of between 2.00% and 3.25%, which are used to calculate the periodic interest rate changes: the London Interbank Offered Rate (“LIBOR”), SOFR, the FHLB Eleventh District cost of funds (“COFI”), the 12-month average U.S. Treasury (“12 MAT”) or the weekly average yield on one year U.S. Treasury securities adjusted to a constant maturity of one year (“CMT”).  Loans based on the LIBOR index constitute a majority of the Bank’s loans held for investment.  The majority of the ARM loans held for investment have five, seven, or  ten-year fixed periods prior to the first adjustment (“5/1, 7/1, or 10/1 hybrids”) and provide for fully amortizing loan payments throughout the term of the loan.  Loans of this type have embedded interest rate risk if interest rates should rise during the initial fixed rate period.

Prior to fiscal 2009, the Bank offered stated income single-family mortgage loans.  As of June 30, 2021 and 2020, the outstanding balance of the stated income single-family mortgage loans was $26.0 million and $38.5 million, respectively, of which $997,000 and $1.8 million, respectively were non-performing, while no loans were 30-89 days delinquent at June 30, 2021 and 2020.

Borrower demand for ARM loans versus fixed-rate mortgage loans is a function of the level of interest rates, the expectations of changes in the level of interest rates and the difference between the initial interest rates and fees charged for each type of loan.  The relative amount of fixed-rate mortgage loans and ARM loans that can be originated at any time is largely determined by the demand for each product in a given interest rate and competitive environment. Given the recent low-rate market environment, the production of ARM loans was significantly lower than fixed rate mortgages.

The retention of ARM loans, rather than fixed-rate loans, helps to reduce the Bank’s exposure to changes in interest rates.  There is, however, unquantifiable credit risk resulting from the potential of increased interest charges to be paid by the borrower as a result of increases in interest rates.  It is possible that, during periods of rising interest rates, the risk of default on ARM loans may increase as a result of the increase in the required payment from the borrower.  Further, the risk of default may increase because ARM loans originated by the Bank occasionally provide, as a marketing incentive, for initial rates of interest below those rates that would apply if the adjustment index plus the applicable margin were initially used for pricing.  Because of these characteristics, ARM loans are subject to increased risks of default or delinquency.  Additionally, while ARM loans allow the Bank to increase the sensitivity of its assets as a result of changes in interest rates, the extent of this interest rate sensitivity is limited by the periodic and lifetime interest rate adjustment limits. Furthermore, because loan indexes may not respond perfectly to changes in market interest rates, upward adjustments on loans may occur more slowly than increases in the Bank’s cost of interest-bearing liabilities, especially during periods of rapidly increasing interest rates. Conversely, downward adjustments on the Bank’s cost of funds typically lag adjustments on ARM loans which may occur more rapidly during periods of declining interest rates. For additional information concerning the effect of interest rates on our loan portfolio, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” of this Form 10-K.

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The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) requires lenders to make a reasonable, good faith determination of a borrower’s ability to repay any consumer closed-end credit transaction secured by a dwelling and to limit prepayment penalties.  Increased risks of legal challenge, private right of action and regulatory enforcement actions result from these rules. The Bank may originate loans that do not meet the definition of a “qualified mortgage” (“QM”). To mitigate the risks involved with non-QM loans, the Bank has implemented systems, processes, procedural and product changes, and maintains its underwriting standards, to ensure that the “ability-to-repay” requirements are adequately addressed.

A decline in real estate values subsequent to the time of origination of real estate secured loans could result in higher loan delinquency levels, foreclosures, provisions for loan losses and net charge-offs.  Real estate values and real estate markets are beyond the Bank’s control and are generally affected by changes in national, regional or local economic conditions and other factors.  These factors include fluctuations in interest rates and the availability of loans to potential purchasers, housing supply and demand, changes in tax laws and other governmental statutes, regulations and policies and acts of nature, such as earthquakes, fires and other natural disasters particular to California where substantially all of our real estate collateral is located.  If real estate values decline from the levels at the time of loan origination, the value of our real estate collateral securing the loans could be significantly reduced.  Our ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished and it would be more likely to suffer losses on defaulted loans.

Multi-Family and Commercial Real Estate Mortgage Loans.  At June 30, 2021, multi-family mortgage loans were $484.4 million and commercial real estate loans were $95.3 million, or 56.8% and 11.2%, respectively, of loans held for investment.  This compares to multi-family mortgage loans of $491.9 million and commercial real estate loans of $105.2 million, or 54.4% and 11.6%, respectively, of loans held for investment at June 30, 2020.  Consistent with its strategy to diversify the composition of loans held for investment, the Bank has made the origination and purchase of multi-family and commercial real estate loans a priority.  During fiscal 2021 the Bank originated $88.8 million and purchased $11.5 million of multi-family and commercial real estate loans, all of which were underwritten in accordance with the Bank’s origination guidelines.  This compares to loan originations of $65.5 million and loan purchases of $71.3 million during fiscal 2020. At June 30, 2021, the Bank had 654 multi-family and 134 commercial real estate loans in loans held for investment. This compares to 660 multi-family and 143 commercial real estate loans in loans held for investment at June 30, 2020.

Multi-family mortgage loans originated by the Bank are predominately adjustable rate loans, including 1/1, 3/1, 5/1, 7/1 and 10/1 hybrids, with a term to maturity of 10 to 30 years and a 25 to 30 year amortization schedule.  Commercial real estate loans originated by the Bank are also predominately adjustable rate loans, including 1/1, 3/1 and 5/1 hybrids, with a term to maturity of 10 to 30 years and a 25 to 30 year amortization schedule.  Rates on multi-family and commercial real estate ARM loans generally adjust monthly, quarterly, semi-annually or annually at a specific margin over the respective interest rate index, subject to period interest rate caps and life-of-loan interest rate caps.  At June 30, 2021, $466.1 million, or 96.2%, of the Bank’s multi-family loans were secured by five to 36 unit projects.  The Bank’s commercial real estate loan portfolio generally consists of loans secured by small office buildings, light industrial buildings, warehouses and small retail centers.  Properties securing multi-family and commercial real estate loans are primarily located in Alameda, Los Angeles, Orange, Riverside, San Bernardino, San Diego, San Francisco and Santa Clara counties.  The Bank originates multi-family and commercial real estate loans in amounts typically ranging from $350,000 to $6.0 million.  At June 30, 2021, the Bank had 60 commercial real estate and multi-family loans with principal balances greater than $1.5 million totaling $139.6 million.  The Bank obtains appraisals on all properties that secure multi-family and commercial real estate loans.  Underwriting of multi-family and commercial real estate loans includes, among other considerations, a thorough analysis of the cash flows generated by the property to support the debt service and the financial resources, experience and the income level of the borrowers and guarantors.

Multi-family and commercial real estate loans afford the Bank an opportunity to price the loans with higher interest rates than those generally available from single-family mortgage loans.  However, loans secured by such properties are generally greater in amount, more difficult to evaluate and monitor and are more susceptible to default as a result of general economic conditions and, therefore, involve a greater degree of risk than single-family residential mortgage loans.  Because payments on loans secured by multi-family and commercial real estate properties are often dependent on the successful operation and management of the properties, repayment of such loans may be impacted by adverse

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conditions in the real estate market or the economy.  During both fiscal 2021 and 2020, the Bank had no charge-offs or recoveries on non-performing multi-family and commercial real estate loans. At June 30, 2021, there was one non-performing multi-family loan of $781,000 and no non-performing commercial real estate loans, as compared to no non-performing multi-family and commercial real estate loans at June 30, 2020. At June 30, 2021 and 2020, there were no multi-family or commercial real esate loans that were past due 30 to 89 days. Non-performing loans and/or delinquent loans may increase if there is a general decline in California real estate markets and in the event poor general economic conditions prevail.

Construction Loans.  The Bank originates from time to time two types of construction loans: short-term construction loans and construction/permanent loans.  During fiscal 2021 and 2020, the Bank originated a total of $5.4 million and $4.0 million of construction loans (including undisbursed loan funds), respectively.  As of June 30, 2021 and 2020, the Bank had short-term construction loans totaling $2.8 million and $6.3 million, respectively, and construction/permanent loans totaling $279,000 and $1.5 million respectively, net of undisbursed loan funds of $3.0 million and $4.0 million, respectively.

Short-term construction loans include three types of loans: custom construction, tract construction, and speculative construction. The Bank provides construction financing for single-family, multi-family and commercial real estate properties.  Custom construction loans are made to individuals who, at the time of application, have a contract executed with a builder to construct their residence.  Custom construction loans are generally originated for a term of 12 to 18 months, with adjustable or fixed interest rates at the prime lending rate plus a margin and with loan-to-value ratios of up to 75% of the appraised value of the completed property.  The owner secures long-term permanent financing at the completion of construction. At June 30, 2021, there were two custom single-family construction loans totaling $1.7 million with $611,000 of undisbursed funds. This compares to June 30, 2020 when the Bank had two custom single-family construction loans totaling $2.1 million with $376,000 of undisbursed funds.

From time to time the Bank makes lot loans to individuals to finance land acquisition prior to the start of construction or tract construction loans to subdivision builders.  These subdivisions are usually financed and built in phases.  A thorough analysis of market trends and demand within the area are reviewed for feasibility.  Tract construction may include the building and financing of model homes under a separate loan. At June 30, 2021, there was one land loan of $139,000 and no tract construction loans, as compared to one land loan of $143,000 and no tract construction loans at June 30, 2020.

Speculative construction loans are made to home builders and are termed “speculative” because the home builder does not have, at the time of loan origination, a signed sale contract with a home buyer who has a commitment for permanent financing with either the Bank or another lender for the finished home.  The home buyer may be identified during or after the construction period.  The builder may be required to debt service the speculative construction loan for a significant period of time after the completion of construction until the homebuyer is identified.  At June 30, 2021, there were no single-family speculative construction loans. This compares to June 30, 2020 when the Bank had three single-family speculative construction loans totaling $2.6 million with $828,000 of undisbursed funds.

Construction/permanent loans automatically roll from the construction to the permanent phase.  The construction phase of a construction/permanent loan generally lasts nine to 12 months and the interest rate charged is generally fixed at a margin above prime rate and with a loan-to-value ratio of up to 75% of the appraised value of the completed property.  At June 30, 2021, there were $279,000 of construction/permanent loans as compared to $1.5 million of construction/permanent loans at June 30, 2020.

Construction loans under $1.0 million are approved by Bank personnel specifically designated to approve construction loans.  The Bank’s Loan Committee, comprised of the Chief Executive Officer, Chief Lending Officer, Chief Financial Officer, Senior Vice President – Single-Family Division and Vice President - Loan Administration, approves all construction loans over $1.0 million.  Prior to approval of any construction loan, an independent fee appraiser inspects the site and the Bank reviews the existing or proposed improvements, identifies the market for the proposed project, and analyzes the pro-forma data and assumptions on the project.  In the case of a tract or speculative construction loan, the Bank reviews the experience and expertise of the builder.  The Bank obtains credit reports, financial statements and tax returns on the borrowers and guarantors, an independent appraisal of the project, and any other expert report necessary to evaluate the proposed project.  In the event of cost overruns, the Bank requires the borrower to deposit their own funds

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into a loan-in-process account, which the Bank disburses consistent with the completion of the subject property pursuant to a revised disbursement schedule.

The construction loan documents require that construction loan proceeds be disbursed in increments as construction progresses.  Disbursements are based on periodic on-site inspections by independent inspectors and Bank personnel.  At inception, the Bank also requires borrowers to deposit funds into the loan-in-process account covering the difference between the actual cost of construction and the loan amount.  The Bank regularly monitors the construction loan portfolio, economic conditions and housing inventory.  The Bank’s property inspectors perform periodic inspections.  The Bank believes that the internal monitoring system helps reduce many of the risks inherent in its construction loans.

Construction loans afford the Bank the opportunity to achieve higher interest rates and fees with shorter terms to maturity than its single-family mortgage loans.  Construction loans, however, are generally considered to involve a higher degree of risk than single-family mortgage loans because of the inherent difficulty in estimating both a property’s value at completion of the project and the cost of the project.  The nature of these loans is such that they are generally more difficult to evaluate and monitor.  If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the project.  If the estimate of value upon completion proves to be inaccurate, the Bank may be confronted with a project whose value is insufficient to assure full repayment.  Projects may also be jeopardized by disagreements between borrowers and builders and by the failure of builders to pay subcontractors.  Loans to builders to construct homes for which no purchaser has been identified carry additional risk because the payoff for the loan depends on the builder’s ability to sell the property prior to the time that the construction loan matures.  The Bank has sought to address these risks by adhering to strict underwriting policies, disbursement procedures and monitoring practices.  In addition, because the Bank’s construction lending is in its primary market area, changes in the local or regional economy and real estate market could adversely affect the Bank’s construction loans held for investment. During fiscal 2021 and 2020, the Bank had no charge-offs or recoveries and no loans were non-performing or 30-89 days delinquent at June 30, 2021.

Participation Loan Purchases and Sales.  In an effort to expand production and diversify risk, the Bank purchases loans and loan participations, with collateral primarily in California, which allows for greater geographic distribution outside of the Bank’s primary lending areas.  The Bank generally purchases between 50% and 100% of the total loan amount. When the Bank purchases a participation loan, the lead lender will usually retain a servicing fee, thereby decreasing the loan yield.  This servicing fee approximates the expense the Bank would incur if the Bank were to service the loan.  All properties serving as collateral for loan participations are inspected by an employee of the Bank or a third party inspection service prior to being approved by the Loan Committee and the Bank relies upon the same underwriting criteria required for those loans originated by the Bank.  The Bank purchased $16.9 million of loans to be held for investment (primarily single-family and multi-family loans) in fiscal 2021, compared to $142.1 million of purchased loans to be held for investment (primarily single-family and multi-family loans) in fiscal 2020. The decline in loan purchases was due primarily to the uncertainly of the asset quality during the COVID-19 pandemic. As of June 30, 2021, total loans serviced by other financial institutions were $13.6 million, as compared to $23.9 million at June 30, 2020. As of June 30, 2021, all loans serviced by others were performing according to their original contractual payment terms, except for one loan of $365,000 that was in the non-performing category. As of June 30, 2020, all loans serviced by others were performing according to their original contractual payment terms, except for two loans that were in forbearance pursuant to a loan modification consistent with the Coronavirus Aid, Relief, and Economic Security Act of 2020, (“CARES Act”) signed into law on March 27, 2020 and/or the April 7, 2020 Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (“Interagency Statement”). The CARES Act as amended on December 27, 2020, by the Consolidated Appropriations Act (“CAA”), and the Interagency Statement provides guidance regarding the modification of loans as a result of the COVID-19 pandemic, and outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act and/or Interagency Statement prior to any relief, are not troubled debt restructurings, through January 1, 2022 or 60 days after the end of the national emergency declared by the President, whichever is earlier. For additional information related to loan modifications as a result of the COVID-19 pandemic, see “Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – COVID-19 Impact to the Corporation.”

The Bank also sells participating interests in loans when it has been determined that it is beneficial to diversify the Bank’s risk.  Participation sales enable the Bank to maintain acceptable loan concentrations and comply with the Bank’s loans to

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one borrower policy.  Generally, selling a participating interest in a loan increases the yield to the Bank on the portion of the loan that is retained.  The Bank did not sell any participation loans in fiscal 2021 or fiscal 2020.

Commercial Business Loans.  The Bank has a Business Banking Department that primarily serves businesses located within the Inland Empire.  Commercial business loans allow the Bank to diversify its lending and increase the average loan yield.  As of June 30, 2021, commercial business loans were $849,000, or 0.1% of loans held for investment, up 77% from $480,000, or 0.1% of loans held for investment at June 30, 2020.  These loans represent secured and unsecured lines of credit and term loans secured by business assets.

Commercial business loans are generally made to customers who are well known to the Bank and are generally secured by accounts receivable, inventory, business equipment and/or other assets.  The Bank’s commercial business loans may be structured as term loans or as lines of credit.  Lines of credit are made at variable rates of interest equal to a negotiated margin above the prime rate and term loans are at a fixed or variable rate.  The Bank may also require personal guarantees from financially capable parties associated with the business based on a review of personal financial statements.  Commercial business term loans are generally made to finance the purchase of assets and have maturities of five years or less.  Commercial lines of credit are typically made for the purpose of providing working capital and are usually approved with a term of one year or less.

Commercial business loans involve greater risk than residential mortgage loans and involve risks that are different from those associated with residential and commercial real estate loans.  Real estate loans are generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral value and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default.  Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets including real estate, the liquidation of collateral in the event of a borrower default is often an insufficient source of repayment because accounts receivable may not be collectible and inventories and equipment may be obsolete or of limited use.  Accordingly, the repayment of a commercial business loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is secondary and oftentimes an insufficient source of repayment.  At June 30, 2021, there were no non-performing commercial business loans, as compared to $31,000 of non-performing commercial business loans, net of allowances and charge-offs at June 20, 2020. During fiscal 2021 or 2020, the Bank had no charge-offs or recoveries on commercial business loans.

Consumer Loans.  At June 30, 2021 and 2020, the Bank’s consumer loans were $95,000 and $94,000, respectively, or less than 0.1% of the Bank’s loans held for investment at these dates.  The Bank offers open-ended lines of credit on either a secured or unsecured basis.  The Bank offers secured savings lines of credit which have an interest rate that is four percentage points above the COFI, which adjusts monthly.  There were no secured savings lines of credit at June 30, 2021 and 2020.

Consumer loans potentially have a greater risk than residential mortgage loans, particularly in the case of loans that are unsecured.  Consumer loan collections are dependent on the borrower’s ongoing financial stability, and thus are more likely to be adversely affected by job loss (especially now as a result of the COVID-19 pandemic), illness or personal bankruptcy.  Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.  The Bank had no non-performing consumer loans at June 30, 2021 and 2020.  During fiscal 2021, the Bank had $1,000 of net chargeoffs on consumer loans, as compared to net recoveries of $1,000 during fiscal 2020.

Loans Originations, Purchases, Sales and Repayments

Mortgage loans are primarily originated for investment. Prior to scaling back originations of saleable single-family fixed-rate mortgage loans during fiscal 2019, a large amount of single-family fixed-rate mortgage loans were originated for sale to institutional investors. Mortgage loans sold to investors generally were sold without recourse other than standard representations and warranties. Generally, mortgage loans sold to Fannie Mae and Freddie Mac were sold on a non-recourse basis and foreclosure losses are generally the responsibility of the purchaser and not the Bank, except in the case of Federal Housing Administration (“FHA”) and Veterans’ Administration (“VA”) loans used to form Government National Mortgage Association pools, which are subject to limitations on the FHA’s and VA’s loan guarantees.

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The following table shows the Bank’s loan originations, purchases, sales and principal repayments during the periods indicated:

	Year Ended June 30,
(In Thousands)	2021		2020		2019
Loans originated for sale:
Retail originations	$	147	$	—	$	296,992
Wholesale originations		—		—		170,102
Total loans originated for sale		147		—		467,094
Loans sold:
Servicing released		—		—		(551,754)
Servicing retained		(147)		—		(7,196)
Total loans sold		(147)		—		(558,950)
Loans originated for investment:
Mortgage loans:
Single-family		120,699		36,427		55,410
Multi-family		85,011		51,022		42,191
Commercial real estate		3,818		14,468		15,402
Construction		5,426		3,983		7,159
Other		—		143		—
Consumer loans		—		1		—
Total loans originated for investment		214,954		106,044		120,162
Loans purchased for investment:
Mortgage loans:
Single-family		5,446		70,733		33,256
Multi-family		11,463		71,344		16,645
Commercial real estate		—		—		1,157
Total loans purchased for investment		16,909		142,077		51,058
Loan principal repayments		(281,477)		(228,250)		(195,386)
(Decrease) increase in other items, net (1)		(2,222)		3,000		(3,036)
Net (decrease) increase in loans held for investment and loans held for sale at fair value	$	(51,836)	$	22,871	$	(119,058)

(1) Includes net changes in undisbursed loan funds, deferred loan fees or costs, allowance for loan losses, fair value of loans held for investment, fair value of loans held for sale, advance payments of escrows and repurchases.

Loan Servicing

The Bank receives fees from a variety of investors in return for performing the traditional services of collecting individual loan payments on loans sold by the Bank to such investors.  At June 30, 2021, the Bank was servicing $50.4 million of loans for others, a 42% decrease from $86.5 million at June 30, 2020.  The decrease was primarily attributable to loan prepayments.  Loan servicing includes processing payments, accounting for loan funds and collecting and paying real estate taxes, hazard insurance and other loan-related items such as private mortgage insurance. After the Bank receives the gross mortgage payment from individual borrowers, it remits to the investor a predetermined net amount based on the loan sale agreement for that mortgage.

Servicing assets are amortized in proportion to and over the period of the estimated net servicing income and are carried at the lower of cost or fair value.  The fair value of servicing assets is determined by calculating the present value of the estimated net future cash flows consistent with contractually specified servicing fees.  The Bank periodically evaluates

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servicing assets for impairment, which is measured as the excess of cost over fair value.  This review is performed on a disaggregated basis, based on loan type and interest rate.  Generally, loan servicing becomes more valuable when interest rates rise (as prepayments typically decrease) and less valuable when interest rates decline (as prepayments typically increase).  In estimating fair values at June 30, 2021 and 2020, the Bank used a weighted average Constant Prepayment Rate (“CPR”) of 21.82% and 26.07%, respectively, and a weighted-average discount rate of 9.10% and 9.11%, respectively. The required impairment reserve against servicing assets at June 30, 2021 and 2020 was $176,000 and $291,000, respectively. In aggregate, servicing assets had a carrying value of $384,000 and a fair value of $208,000 at June 30, 2021, compared to a carrying value of $673,000 and a fair value of $382,000 at June 30, 2020.

Delinquencies and Classified Assets

Delinquent Loans.  When a mortgage loan borrower fails to make a required payment when due, the Bank initiates collection procedures.  In most cases, delinquencies are cured promptly; however, if the loan remains delinquent on the 120th day for single-family loans or the 90th day for other loans, or sooner if the borrower is chronically delinquent, and after all reasonable means of obtaining the payment have been exhausted, foreclosure proceedings, according to the terms of the security instrument and applicable law, are initiated.  Interest income is reduced by the full amount of accrued and uncollected interest on such loans.

The following table sets forth delinquencies in the Bank’s loans held for investment as of the dates indicated, gross of collectively and individually evaluated allowances, if any:

	At June 30,
	2021						2020						2019
	30 – 89 Days			Non-performing			30 - 89 Days			Non-performing			30 - 89 Days			Non-performing
	Number	Principal		Number	Principal		Number	Principal		Number	Principal		Number	Principal		Number	Principal
(Dollars In	of	Balance		of	Balance		of	Balance		of	Balance		of	Balance		of	Balance
Thousands)	Loans	of Loans		Loans	of Loans		Loans	of Loans		Loans	of Loans		Loans	of Loans		Loans	of Loans
Mortgage loans:
Single-family	—	$	—	27	$	8,299	1	$	219	18	$	5,318	2	$	660	20	$	5,640
Multi-family	—		—	1		1,119	—		—	—		—	—		—	—		—
Construction	—		—	—		—	—		—	—		—	—		—	1		971
Commercial business loans	—		—	—		—	—		—	1		35	—		—	1		49
Consumer loans(1)	29		7	—		—	15		—	—		—	61		5	—		—
Total	29	$	7	28	$	9,418	16	$	219	19	$	5,353	63	$	665	22	$	6,660

(1) At June 30, 2021, 2020 and 2019, the balance includes 29, 15 and 61 overdrawn consumer deposit accounts, respectively.

As of June 30, 2021, total non-performing assets, net of allowance for loan losses and fair value adjustments, were $8.6 million, or 0.73% of total assets, which was primarily comprised of: 27 single-family loans ($7.9 million); one multi-family loan ($781,000); and no real estate owned (“REO”). As of June 30, 2021, $7.7 million, or 89%, of non-performing loans had a current payment status. This compares to total non-performing assets, net of allowance for loan losses and fair value adjustments, of $4.9 million, or 0.42% of total assets, with $1.6 million, or 33%, of non-performing loans with a current payment status at June 30, 2020 and no REO.

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The following table sets forth information with respect to the Bank’s non-performing assets and troubled debt restructurings (“restructured loans”), net of allowance for loan losses and fair value adjustments, at the dates indicated:

	At June 30,
(Dollars In Thousands)	2021			2020			2019			2018			2017
Loans on non-performing status (excluding restructured loans):
Mortgage loans:
Single-family	$	882		$	2,281		$	3,315		$	2,665		$	4,668
Multi-family		781			—			—			—			—
Commercial real estate		—			—			—			—			201
Construction		—			—			971			—			—
Total		1,663			2,281			4,286			2,665			4,869
Accruing loans past due 90 days or more		—			—			—			—			—
Restructured loans on non-performing status:
Mortgage loans:
Single-family		6,983			2,612			1,891			3,328			3,061
Commercial business loans		—			31			41			64			65
Total		6,983			2,643			1,932			3,392			3,126
Total non-performing loans		8,646			4,924			6,218			6,057			7,995
Real estate owned, net		—			—			—			906			1,615
Total non-performing assets	$	8,646		$	4,924		$	6,218		$	6,963		$	9,610
Non-performing loans as a percentage of loans held for investment, net		1.02	%		0.55	%		0.71	%		0.67	%		0.88	%
Non-performing loans as a percentage of total assets		0.73	%		0.42	%		0.57	%		0.52	%		0.67	%
Non-performing assets as a percentage of total assets		0.73	%		0.42	%		0.57	%		0.59	%		0.80	%

The Bank assesses loans individually and classifies the loans as non-performing and substandard in accordance with regulatory requirements 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 are currently performing.  Factors considered in determining classification include, but are not limited to, expected future cash flows, collateral value, the financial condition of the borrower and current economic conditions. The Bank measures each non-performing loan based on ASC 310, “Receivables,” establishes a collectively evaluated or individually evaluated allowance and charges off those loans or portions of loans deemed uncollectible.

Restructured Loans.  A troubled debt restructuring 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; and

●Extensions, deferrals, renewals and rewrites.

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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 Bank.  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.

For the fiscal year ended June 30, 2021, there were 20 loans (including 19 COVID-19 related forbearance loans downgraded when their monthly payment deferrals were extended beyond six months) that were newly modified from their original terms, re-underwritten or identified as a restructured loan; while two loans were upgraded to pass category; three loans were paid off; and no loans were converted to REO. For the fiscal year ended June 30, 2020, there were no loans that were newly modified from their original terms, re-underwritten or identified as a restructured loan; one loan (previously modified) was downgraded; while three loans were upgraded to the pass category; one loan was paid off; and no loans were converted to REO.  During the fiscal years ended June 30, 2021 and 2020, no restructured loans were in default within a 12-month period subsequent to their original restructuring.  Additionally, during the fiscal year ended June 30, 2021, there were 12 restructured loans totaling $4.7 million that were extended beyond their initial modification terms; while in fiscal year ended 2020, there were no restructured loans that were extended beyond the initial maturity of the modification.

As of June 30, 2021, the net outstanding balance of the Corporation’s 23 restructured loans was $7.9 million of which 20 loans totaling $7.0 million were classified as substandard on non-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. As of June 30, 2020, the net outstanding balance of the Corporation’s eight restructured loans was $2.6 million: all eight loans were classified as substandard on non-accrual status. As of June 30, 2020, $1.7 million, or 65 percent, of the restructured loans were current with respect to their payment status, consistent with their modified terms.

The Bank upgrades restructured single-family loans to the pass category if the borrower has demonstrated satisfactory contractual payments for at least six consecutive months or 12 months for those loans that were restructured more than once and there is a reasonable assurance that the payments will continue.  Once the borrower has demonstrated satisfactory contractual payments beyond 12 consecutive months, the loan is no longer categorized as a restructured loan. From March 2020 to March 2021, the Bank offered short-term loan modifications to assist borrowers during the COVID-19 pandemic. The CARES Act and Interagency Statement provided that a short-term modification made in response to COVID-19 and which meets certain criteria does not need to be accounted for as a restructured loan. Accordingly, the Corporation does not account for such loan modifications as restructured loans. For additional information related to loan modifications as a result of the COVID-19 pandemic, see “Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – COVID-19 Impact to the Corporation.”

Other Loans of Concern.  As of June 30, 2021, $1.8 million of loans (all single-family loans) which were not disclosed as non-performing loans were classified as special mention because known information about possible credit problems of the borrowers causes management to have some doubt as to the ability of such borrowers to comply with present loan repayment terms. As of June 30, 2020, $8.6 million of loans which were not disclosed as non-performing loans were classified as special mention because known information about possible credit problems of the borrowers causes management to have some doubt as to the ability of such borrowers to comply with present loan repayment terms. Of these loans, $3.1 million were single-family mortgage loans, $3.8 million were multi-family mortgage loans and $1.7 million was a construction loan.

Foreclosed Real Estate.  Real estate acquired by the Bank as a result of foreclosure or by deed-in-lieu of foreclosure is classified as REO until it is sold.  When a property is acquired, it is recorded at its fair market value less the estimated cost of sale.  Subsequent declines in value are charged to operations.  As of June 30, 2021 and 2020, there was no REO property at both dates. In managing the real estate owned properties for quick disposition, the Bank completes the necessary repairs and maintenance to the individual properties before listing for sale, obtains new appraisals and broker price opinions (“BPO”) to determine current market listing prices, and engages local realtors who are most familiar with real estate sub-markets, among other techniques, which generally results in the quick disposition of real estate owned.

Asset Classification.  The OCC has adopted various regulations regarding the problem assets of savings institutions.  The regulations require that each institution review and classify its assets on a regular basis.  In addition, in connection with

14

examinations of institutions, OCC examiners have the authority to identify problem assets and, if appropriate, require them to be classified.  There are three classifications for problem assets: substandard, doubtful and loss.  Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.  Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss.  An asset classified as a loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted.  If an asset or portion thereof is classified as loss, the institution establishes an individually evaluated allowance and may subsequently charge-off the amount of the asset classified as loss.  A portion of the allowance for loan losses established to cover probable losses related to assets classified substandard or doubtful may be included in determining an institution’s regulatory capital.  Assets that do not currently expose the institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as special mention and are closely monitored by the Bank.

Classified assets improved 26% to $10.4 million at June 30, 2021 from $14.1 million at June 30, 2020. The aggregate amounts of the Bank’s classified assets are located in California.

The following table summarizes classified assets, which is comprised of classified loans, including loans classified by the Bank as special mention, net of allowance for loan losses, and REO at the dates indicated:

	At June 30, 2021				At June 30, 2020
(Dollars In Thousands)	Balance			Count	Balance			Count
Special mention loans:
Mortgage loans:
Single-family	$	1,767		4	$	3,120		7
Multi-family		—		—		3,777		3
Construction		—		—		1,703		1
Total special mention loans		1,767		4		8,600		11
Substandard loans:
Mortgage loans:
Single-family		7,865		29		5,438		22
Multi-family		781		1		—		—
Commercial business loans		—		—		31		1
Total substandard loans		8,646		30		5,469		23
Total classified loans		10,413		34		14,069		34
Real estate owned:
Single-family		—		—		—		—
Total real estate owned		—		—		—		—
Total classified assets	$	10,413		34	$	14,069		34
Total classified assets as a percentage of total assets		0.88	%			1.20	%

Not all of the Bank’s classified assets are delinquent or non-performing.  In determining whether the Bank’s assets expose the Bank to sufficient risk to warrant classification, the Bank may consider various factors, including the payment history of the borrower, the loan-to-value ratio, and the debt coverage ratio of the property securing the loan.  After consideration of these and other factors, the Bank may determine that the asset in question, though not currently delinquent, presents a risk of loss that requires it to be classified or designated as special mention.  In addition, the Bank’s loans held for investment may include single-family, commercial and multi-family real estate loans with a balance exceeding the current market value of the collateral which are not classified because they are performing and have borrowers who have sufficient resources to support the repayment of the loan.

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Allowance for Loan Losses.  The allowance for loan losses is maintained to cover losses inherent in the loans held for investment.  In originating loans, the Bank recognizes that losses will be experienced and that the risk of loss will vary with, among other factors, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the collateral securing the loan. The responsibility for the review of the Bank’s assets and the determination of the adequacy of the allowance lies with the Internal Asset Review Committee (“IAR Committee”).  The Bank adjusts its allowance for loan losses by charging (crediting) its provision (recovery) for loan losses against the Bank’s operations.

The Bank has established a methodology for the determination of the provision for loan losses.  The methodology is set forth in a formal policy and takes into consideration the need for a collectively evaluated allowance for groups of homogeneous loans and an individually evaluated allowance that are tied to individual problem loans.  The Bank’s methodology for assessing the appropriateness of the allowance consists of several key elements.

The allowance is calculated by applying loss factors to the loans held for investment. The loss factors are applied according to loan program type and loan classification.  The loss factors for each program type and loan classification are established based on an evaluation of the historical loss experience, prevailing market conditions, concentration in loan types and other relevant factors consistent with ASC 450, “Contingency”.  Homogeneous loans, such as residential mortgage, home equity and consumer installment loans are considered on a pooled loan basis.  A factor is assigned to each pool based upon expected charge-offs for one year.   The factors for larger, less homogeneous loans, such as construction and commercial real estate loans, are based upon loss experience tracked over business cycles considered appropriate for the loan type.

Collectively evaluated or individually evaluated allowances are established to absorb losses on loans for which full collectability may not be reasonably assured as prescribed in ASC 310.  Estimates of identifiable losses are reviewed continually and, generally, a provision (recovery) for losses is charged (credited) against operations on a quarterly basis as necessary to maintain the allowance at an appropriate level.  Management presents the minutes summarizing the actions of the IAR Committee to the Bank’s Board of Directors on a quarterly basis.

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 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 Accounting Standards Codification (“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, an individually evaluated allowance is calculated based on the loan's fair value and if the fair value is higher than the loan balance, no allowance is required.

The IAR Committee meets quarterly to review and monitor conditions in the portfolio and to determine the appropriate allowance for loan losses.  To the extent that any of these conditions are apparent by identifiable problem loans or portfolio segments as of the evaluation date, the IAR Committee’s estimate of the effect of such conditions may be reflected as an individually evaluated allowance applicable to such loans or portfolio segments.  Where any of these conditions is not apparent by specifically identifiable problem loans or portfolio segments as of the evaluation date, the IAR Committee’s evaluation of the probable loss related to such condition is reflected in the general allowance.  The intent of the IAR Committee is to reduce the differences between estimated and actual losses.  Pooled loan factors are adjusted to reflect current estimates of charge-offs for the subsequent 12 months.  Loss activity is reviewed for non-pooled loans and the loss factors are adjusted, if necessary.   By assessing the probable estimated losses inherent in the loans held for investment on a quarterly basis, the Bank is able to adjust specific and inherent loss estimates based upon the most recent information that has become available.

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At June 30, 2021, the Bank had an allowance for loan losses of $7.6 million, or 0.88% of gross loans held for investment, compared to an allowance for loan losses at June 30, 2020 of $8.3 million, or 0.91% of gross loans held for investment. A $708,000 recovery from the allowance for loan losses was recorded in fiscal 2021, compared to a $1.1 million provision for loan losses in fiscal 2020. The decrease in the allowance for loan losses was due primarily 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. Although management believes the best information available is used to make such provision (recovery), future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations.

While the Bank believes that it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that regulators, in reviewing the Bank’s loan portfolio, will not recommend that the Bank significantly increase its allowance for loan losses.  In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, including as a result of the COVID-19 pandemic, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary. Any material increase in the allowance for loan losses may adversely affect the Bank’s financial condition and results of operations.

The following table sets forth an analysis of the Bank’s allowance for loan losses for the periods indicated.  Where individually evaluated allowances have been established, any differences between the individually evaluated allowances and the amount of loss realized has been charged or credited to current operations.

	Year Ended June 30,
(Dollars In Thousands)	2021			2020			2019			2018			2017
Allowance at beginning of period	$	8,265		$	7,076		$	7,385		$	8,039		$	8,670
(Recovery) provision for loan losses		(708)			1,119			(475)			(536)			(1,042)
Recoveries:
Mortgage Loans:
Single-family		31			70			198			278			507
Multi-family		—			—			—			—			18
Commercial business loans		—			—			—			—			75
Consumer loans		1			2			2			—			13
Total recoveries		32			72			200			278			613
Charge-offs:
Mortgage loans:
Single-family		—			(1)			(31)			(392)			(199)
Consumer loans		(2)			(1)			(3)			(4)			(3)
Total charge-offs		(2)			(2)			(34)			(396)			(202)
Net recoveries (charge-offs)		30			70			166			(118)			411
Allowance at end of period	$	7,587		$	8,265		$	7,076		$	7,385		$	8,039
Allowance for loan losses as a percentage of gross loans held for investment		0.88	%		0.91	%		0.80	%		0.81	%		0.88	%
Net (recoveries) charge-offs as a percentage of average loans receivable, net, during the period		(0.00)	%		(0.01)	%		(0.02)	%		0.01	%		(0.04)	%

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The following table sets forth the breakdown of the allowance for loan losses by loan category at the periods indicated.  Management believes that the allowance can be allocated by category only on an approximate basis.  The allocation of the allowance is based upon an asset classification matrix. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance in one category to absorb losses in any other categories.

	At June 30,
	2021				2020				2019				2018				2017
			% of				% of				% of				% of				% of
			Loans in				Loans in				Loans in				Loans in				Loans in
			Each				Each				Each				Each				Each
			Category				Category				Category				Category				Category
			to Total				to Total				to Total				to Total				to Total
(Dollars In Thousands)	Amount		Loans		Amount		Loans		Amount		Loans		Amount		Loans		Amount		Loans
Mortgage loans:
Single-family	$	2,000	31.48	%	$	2,622	33.04	%	$	2,709	36.87	%	$	2,783	34.80	%	$	3,601	35.51	%
Multi-family		4,485	56.85			4,329	54.38			3,219	49.81			3,492	52.63			3,420	52.89
Commercial real estate		1,006	11.18			1,110	11.64			1,050	12.70			1,030	12.13			879	10.75
Construction		51	0.36			171	0.86			61	0.53			47	0.35			96	0.77
Other		3	0.02			3	0.02			3	0.02			3	0.02			—	—
Commercial business loans		36	0.10			24	0.05			26	0.05			24	0.06			36	0.07
Consumer loans		6	0.01			6	0.01			8	0.02			6	0.01			7	0.01
Total allowance for loan losses	$	7,587	100.00	%	$	8,265	100.00	%	$	7,076	100.00	%	$	7,385	100.00	%	$	8,039	100.00	%

Investment Securities Activities

Federally chartered savings institutions are permitted under federal and state laws to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and government sponsored enterprises and of state and municipal governments, deposits at the FHLB, certificates of deposit of federally insured institutions, certain bankers’ acceptances, mortgage-backed securities and federal funds.  Subject to various restrictions, federally chartered savings institutions may also invest a portion of their assets in commercial paper and corporate debt securities. Savings institutions such as the Bank are also required to maintain an investment in FHLB – San Francisco stock.

The investment policy of the Bank, established by the Board of Directors and implemented by the Bank’s Asset-Liability Committee, seeks to provide and maintain adequate liquidity, complement the Bank’s lending activities, and generate a favorable return on investment without incurring undue interest rate risk or credit risk.  Investments are made based on certain considerations, such as credit quality, yield, maturity, liquidity and marketability. The Bank also considers the effect that the proposed investment would have on the Bank’s risk-based capital requirements and interest rate risk sensitivity.

At June 30, 2021 and 2020, the Bank’s investment securities portfolio was $226.9 million and $123.3 million, respectively, which primarily consisted of federal agency and GSE obligations. The Bank’s investment securities portfolio was classified as held to maturity and available for sale. The Corporation purchased held to maturity mortgage-backed securities totaling $158.0 million and $55.9 million during fiscal 2021 and 2020, respectively. At June 30, 2021 and 2020, our securities portfolio did not contain securities of any issuer with an aggregate book value in excess of 10% of our equity capital, excluding those issued by the United States government or its agencies or a GSE.

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The following table sets forth the composition of the Bank’s investment portfolio at the dates indicated:

	At June 30,
	2021						2020						2019
			Estimated						Estimated						Estimated
	Amortized		Fair				Amortized		Fair				Amortized		Fair
(Dollars In Thousands)	Cost		Value		Percent		Cost		Value		Percent		Cost		Value		Percent
Held to maturity securities:
U.S. government sponsored enterprise MBS(1)	$	220,448	$	221,847	97.17	%	$	115,763	$	118,354	93.99	%	$	90,394	$	91,669	90.47	%
U.S. SBA securities(2)		1,858		1,874	0.82			2,064		2,047	1.63			2,896		2,890	2.85
Certificates of deposits		1,000		1,000	0.44			800		800	0.63			800		800	0.79
Total investment securities - held to maturity	$	223,306	$	224,721	98.43	%	$	118,627	$	121,201	96.25	%	$	94,090	$	95,359	94.11	%
Available for sale securities:
U.S. government agency MBS(1)	$	2,146	$	2,222	0.97	%	$	2,823	$	2,943	2.34	%	$	3,498	$	3,613	3.57	%
U.S. government sponsored enterprise MBS(1)		1,197		1,211	0.53			1,556		1,577	1.25			1,998		2,087	2.06
Private issue CMO(3)		151		154	0.07			204		197	0.16			261		269	0.26
Total investment securities - available for sale	$	3,494	$	3,587	1.57	%	$	4,583	$	4,717	3.75	%	$	5,757	$	5,969	5.89	%
Total investment securities	$	226,800	$	228,308	100.00	%	$	123,210	$	125,918	100.00	%	$	99,847	$	101,328	100.00	%

(1)Mortgage-backed securities (“MBS”)

(2)Small Business Administration ("SBA")

(3)Collateralized mortgage obligations (“CMO”)

The following table sets forth the outstanding balance, maturity and weighted average yield of the investment securities at June 30, 2021:

	Due in				Due				Due				Due
	One Year				After One to				After Five to				After
	or Less				Five Years				Ten Years				Ten Years				Total
(Dollars in Thousands)	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
Held to maturity securities:
U.S. government sponsored enterprise MBS	$	209	2.47	%	$	14,544	2.57	%	$	90,798	1.08	%	$	114,897	1.16	%	$	220,448	1.22	%
U.S. SBA securities		—	—			—	—			—	—			1,858	0.60			1,858	0.60
Certificates of deposits		1,000	0.28			—	—			—	—			—	—			1,000	0.28
Total investment securities -held to maturity	$	1,209	0.66	%	$	14,544	2.57	%	$	90,798	1.08	%	$	116,755	1.15	%	$	223,306	1.21	%
Available for sale securities:
U.S. government agency MBS	$	—	—	%	$	—	—	%	$	—	—	%	$	2,222	2.32	%	$	2,222	2.32	%
U.S. government sponsored enterprise MBS		—	—			—	—			—	—			1,211	2.32			1,211	2.32
Private issue CMO		—	—			—	—			—	—			154	2.52			154	2.52
Total investment securities -available for sale	$	—	—	%	$	—	—	%	$	—	—	%	$	3,587	2.33	%	$	3,587	2.33	%
Total investment securities	$	1,209	0.66	%	$	14,544	2.57	%	$	90,798	1.08	%	$	120,342	1.19	%	$	226,893	1.23	%

The actual maturity and yield for MBS and CMO may differ from the stated maturity and stated yield due to scheduled amortization, loan prepayments and acceleration of premium amortization or discount accretion.

Deposit Activities and Other Sources of Funds

General.  Deposits and loan repayments are the major sources of the Bank’s funds for lending and other investment purposes.  Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows are influenced significantly by general interest rates and money market conditions. Borrowings through the FHLB – San Francisco and repurchase agreements may be used to compensate for declines in the availability of funds from other sources.

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Deposit Accounts.  Substantially all of the Bank’s depositors are residents of the State of California.  Deposits are attracted from within the Bank’s market area by offering a broad selection of deposit instruments, including checking, savings, money market and time deposit accounts. Deposit account terms vary, differentiated by the minimum balance required, the time periods that the funds must remain on deposit and the interest rate, among other factors. In determining the terms of its deposit accounts, the Bank considers current interest rates, profitability to the Bank, interest rate risk characteristics, competition and its customers’ preferences and concerns.  Generally, the Bank’s deposit rates are commensurate with the median rates of its competitors within a given market.  The Bank may occasionally pay above-market interest rates to attract or retain deposits when less expensive sources of funds are not available. The Bank may also pay above-market interest rates in specific markets in order to increase the deposit base of a particular office or group of offices.  The Bank reviews its deposit composition and pricing on a weekly basis.

The Bank generally offers time deposits for terms not exceeding seven years. As illustrated in the following table, time deposits represented 15% of the Bank’s deposit portfolio at June 30, 2021, compared to 19% at June 30, 2020. As of June 30, 2021 and 2020, there were no brokered deposits. The Bank attempts to reduce the overall cost of its deposit portfolio and to increase its franchise value by emphasizing transaction accounts, which are subject to a heightened degree of competition.  For additional information, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K.

The following table sets forth information concerning the Bank’s weighted-average interest rate of deposits at June 30, 2021:

Weighted							Percentage
Average			Minimum		Balance		of Total
Interest Rate	Original Term	Deposit  Account Type	Amount		(In Thousands)		Deposits
		Transaction accounts:
—%	N/A	Checking accounts – non interest-bearing	$	—	$	123,179	13.13	%
0.04%	N/A	Checking accounts – interest-bearing	$	—		327,388	34.90
0.05%	N/A	Savings accounts	$	10		307,299	32.76
0.15%	N/A	Money market accounts	$	—		39,670	4.23
		Time deposits:
0.05%	30 days or less	Fixed-term, fixed rate	$	1,000		20	—
0.05%	31 to 90 days	Fixed-term, fixed rate	$	1,000		4,711	0.50
0.05%	91 to 180 days	Fixed-term, fixed rate	$	1,000		5,382	0.58
0.14%	181 to 365 days	Fixed-term, fixed rate	$	1,000		34,233	3.65
0.31%	Over 1 to 2 years	Fixed-term, fixed rate	$	1,000		23,036	2.46
0.76%	Over 2 to 3 years	Fixed-term, fixed rate	$	1,000		13,535	1.44
1.16%	Over 3 to 5 years	Fixed-term, fixed rate	$	1,000		46,515	4.96
1.80%	Over 5 to 10 years	Fixed-term, fixed rate	$	1,000		13,005	1.39
0.15%					$	937,973	100.00	%

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The following table indicates the aggregate dollar amount of the Bank’s time deposits with balances of $100,000 or more differentiated by time remaining until maturity as of June 30, 2021:

Maturity Period	Amount
(In Thousands)
Three months or less	$	13,763
Over three to six months		12,066
Over six to twelve months		11,217
Over twelve months		32,365
Total	$	69,411

Deposit Flows. The following table sets forth the balances (inclusive of interest credited) and changes in the dollar amount of deposits in the various types of accounts offered by the Bank at and between the dates indicated:

	At June 30,
	2021						2020
			Percent						Percent
			of		Increase				of		Increase
(Dollars In Thousands)	Amount		Total		(Decrease)		Amount		Total		(Decrease)
Checking accounts – non interest-bearing	$	123,179	13.13	%	$	4,408	$	118,771	13.30	%	$	28,587
Checking accounts – interest-bearing		327,388	34.90			36,925		290,463	32.53			32,554
Savings accounts		307,299	32.76			33,530		273,769	30.66			9,382
Money market accounts		39,670	4.23			(319)		39,989	4.48			4,343
Time deposits:
Fixed-term, fixed rate which mature:
Within one year		76,705	8.18			(13,871)		90,576	10.14			(15,504)
Over one to two years		37,687	4.02			3,692		33,995	3.81			(3,122)
Over two to five years		25,646	2.74			(18,825)		44,471	4.98			(4,782)
Over five years		399	0.04			(536)		935	0.10			240
Total	$	937,973	100.00	%	$	45,004	$	892,969	100.00	%	$	51,698

Time Deposits by Rates.  The following table sets forth the aggregate balance of time deposits categorized by interest rates at the dates indicated:

	At June 30,
(Dollars In Thousands)	2021		2020		2019
Below 1.00%	$	85,125	$	79,521	$	80,701
1.00 to 1.99%		50,238		85,232		95,904
2.00 to 2.99%		5,074		5,224		16,540
Total	$	140,437	$	169,977	$	193,145

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Time Deposits by Maturities.  The following table sets forth the aggregate dollar amount of time deposits at June 30, 2021 differentiated by interest rates and maturity:

			Over One		Over Two		Over Three		After
	One Year		to		to		to		Four
(Dollars In Thousands)	or Less		Two Years		Three Years		Four Years		Years		Total
Below 1.00 %	$	56,376	$	17,466	$	4,112	$	5,123	$	2,048	$	85,125
1.00 to 1.99 %		20,329		15,147		7,118		6,800		844		50,238
2.00 to 2.99 %		—		5,074		—		—		—		5,074
Total	$	76,705	$	37,687	$	11,230	$	11,923	$	2,892	$	140,437

Deposit Activity.  The following table sets forth the deposit activity of the Bank at and for the periods indicated:

	At or For the Year Ended June 30,
(In Thousands)	2021		2020		2019
Beginning balance	$	892,969	$	841,271	$	907,598
Net deposits (withdrawals) before interest credited		43,259		48,755		(69,708)
Interest credited		1,745		2,943		3,381
Net increase (decrease) in deposits		45,004		51,698		(66,327)
Ending balance	$	937,973	$	892,969	$	841,271

Borrowings.  The FHLB – San Francisco functions as a central reserve bank providing credit for member financial institutions.  As a member, the Bank is required to own capital stock in the FHLB – San Francisco and is authorized to apply for advances using such stock and certain of its mortgage loans and other assets (principally investment securities) as collateral, provided certain creditworthiness standards have been met.  Advances are made pursuant to several different credit programs.  Each credit program has its own interest rate, maturity, terms and conditions.  Depending on the program, limitations on the amount of advances are based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit.  The Bank utilizes advances from the FHLB – San Francisco as an alternative to deposits to supplement its supply of lendable funds, to meet deposit withdrawal requirements and to help manage interest rate risk.  The FHLB – San Francisco has, from time to time, served as the Bank’s primary borrowing source.  

As of June 30, 2021 and 2020, the FHLB – San Francisco borrowing capacity was limited to 35% of the Bank’s total assets at both dates, amounting to $416.2 million and $387.6 million, respectively. Advances from the FHLB – San Francisco are typically secured by the Bank’s single-family residential, multi-family and commercial real estate mortgage loans.  Total mortgage loans pledged to the FHLB – San Francisco were $607.0 million at June 30, 2021 as compared to $658.7 million at June 30, 2020. In addition, the Bank pledged investment securities totaling $1.6 million at June 30, 2021 as compared to $2.2 million at June 30, 2020 to collateralize its FHLB – San Francisco advances under the Securities-Backed Credit (“SBC”) facility. At June 30, 2021 and 2020, the Bank had $101.0 million and $141.0 million of borrowings, respectively, from the FHLB – San Francisco with a weighted-average interest rate of 2.19% and 2.23%, respectively.  At June 30, 2021, the outstanding borrowings mature between 2021 and 2025 with a weighted average maturity of 24 months.  

In addition to the total borrowings mentioned above, the Bank utilized its borrowing facility for letters of credit and credit enhancement for loans previously sold to the FHLB – San Francisco under the Mortgage Partnership Finance (“MPF”) program which have a recourse liability.  The outstanding letters of credit and the outstanding MPF credit enhancement was $16.0 million and $2.5 million, respectively, at both June 30, 2021 and 2020.

As of June 30, 2021 and 2020, the remaining financing availability was $296.8 million and $228.1 million, with remaining available collateral of $343.1 million and $351.5 million, respectively.  In addition, as of June 30, 2021 and 2020, the

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Bank had secured a discount window facility of $206.0 million and $94.4 million at the Federal Reserve Bank of San Francisco, collateralized by investment securities with a fair market value of $219.2 million and $100.4 million, respectively.  

The Bank also has a federal funds facility with its correspondent bank for $17.0 million which matures on June 30, 2022.  As of June 30, 2021, there were no outstanding borrowings under the discount window facility or the federal funds facility with the correspondent bank.

The following table sets 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)	2021			2020			2019
Balance outstanding at the end of period:
FHLB – San Francisco advances	$	100,983		$	141,047		$	101,107
Weighted average rate at the end of period:
FHLB – San Francisco advances		2.19	%		2.23	%		2.62	%
Maximum amount of borrowings outstanding at any month end:
FHLB – San Francisco advances	$	141,042		$	141,057		$	136,158
Average short-term borrowings during the period with respect to:(1)
FHLB – San Francisco advances	$	35,631		$	11,562		$	8,425
Weighted average short-term borrowing rate during the period with respect to:(1)
FHLB – San Francisco advances		2.14	%		3.30	%		1.69	%

(1) Borrowings with a remaining term of 12 months or less.

As a member of the FHLB – San Francisco, the Bank is required to maintain a minimum investment in FHLB – San Francisco stock.  The Bank held the required investment at June 30, 2021 of $8.2 million with no excess investment. This compares to June 30, 2020 when the Bank held an investment of $8.0 million with an excess investment of $1.1 million.

During fiscal 2021, the Bank was required to purchase $185,000 of the FHLB – San Francisco capital stock and did not redeem any of the capital stock. During fiscal 2020, the FHLB – San Francisco redeemed $229,000 of the excess capital stock, while the Bank did not purchase any FHLB - San Francisco capital stock. In fiscal 2021 and 2020, the FHLB – San Francisco distributed $418,000 and $534,000 of cash dividends, respectively, to the Bank.

Subsidiary Activities

Federal savings institutions generally may invest up to 3% of their assets in service corporations, provided that at least one-half of any amount in excess of 1% is used primarily for community, inner-city and community development projects.  The Bank’s investment in its service corporations did not exceed these limits at June 30, 2021 and 2020.

The Bank has three wholly owned subsidiaries: Provident Financial Corp (“PFC”), Profed Mortgage, Inc., and First Service Corporation.  PFC’s current activities include: (i) acting as trustee for the Bank’s real estate transactions and (ii) holding real estate for investment, if any.  Profed Mortgage, Inc., which formerly conducted the Bank’s mortgage banking activities, and First Service Corporation are currently inactive.  At June 30, 2021 and 2020, the Bank’s investment in its subsidiaries was $10,000 and $9,000, respectively.

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REGULATION

The following is a brief description of certain laws and regulations which are applicable to the Corporation and the Bank.  The description of these laws and regulations, as well as descriptions of laws and regulations contained elsewhere herein, does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.

Legislation is introduced from time to time in the United States Congress (“Congress”) that may affect the Corporation’s and the Bank’s operations.  In addition, the regulations governing the Corporation and the Bank may be amended from time to time by the OCC, FDIC, FRB and SEC, as appropriate.  Any such legislation or regulatory changes in the future could adversely affect the operations and financial condition of the Corporation and the Bank. The Bank cannot predict whether any such changes may occur.

General

The Bank, as a federally chartered savings institution, is subject to extensive regulation, examination and supervision by the OCC, as its primary federal regulator, and the FDIC, as its insurer of deposits.  The Bank's relationship with its depositors and borrowers is regulated by federal consumer protection laws, which must be complied with by the Bank.  The Bank is a member of the FHLB System and its deposits are insured up to applicable limits by the FDIC. The Bank must file reports with the OCC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other financial institutions.  There are periodic examinations by the OCC to evaluate the Bank’s safety and soundness and compliance with various regulatory requirements. This regulatory structure establishes a comprehensive framework of activities in which the Bank may engage and is intended primarily for the protection of the insurance fund and depositors.  The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.  Any change in such policies, whether by the OCC, the FRB, the FDIC or Congress, could have a material adverse impact on the Corporation and the Bank and their operations.  The Corporation, as a savings and loan holding company, is required to file certain reports with, is subject to examination by, and otherwise must comply with the rules and regulations of the FRB, its primary regulator.  The Corporation is also subject to the rules and regulations of the SEC under the federal securities laws.  For additional information, see “Savings and Loan Holding Company Regulations” below in this Form 10-K.

Set forth below is a brief description of material regulatory requirements that are applicable to the Bank and the Corporation. The description is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on the Bank and the Corporation.

Federal Regulation of Savings Institutions

Office of the Comptroller of the Currency.  The OCC has extensive authority over the operations of federal savings institutions.  As part of this authority, the Bank is required to file periodic reports with the OCC and is subject to periodic examinations by the OCC. The OCC also has extensive enforcement authority over all federal savings institutions, including the Bank.  This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease-and-desist or removal orders and initiate prompt corrective action orders.  In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices.  Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OCC.  Except under certain circumstances, public disclosure of final enforcement actions by the OCC is required by law.

All federal savings institutions must pay assessments to the OCC, to fund the agency’s operations.  The general assessments, paid on a semi-annual basis, are determined based on the savings institution’s total assets, including consolidated subsidiaries.  The Bank’s OCC annual assessments for the fiscal years ended June 30, 2021 and 2020 were $218,000 and $227,000, respectively.

The Bank's general permissible lending limit for loans to one borrower is equal to the greater of $500,000 or 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus). The Bank’s limits on loans to one borrower or group of related borrowers at June 30, 2021 and 2020 were $19.4 million and $18.8 million, respectively.  At June 30, 2021, the Bank’s

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largest lending relationship to a single borrower or group of borrowers consists of four multi-family loans totaling $5.3 million, which were performing according to its original payment terms.

Effective July 1, 2019, the OCC issued a final rule implementing a section of the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”) which permits an eligible federal savings bank with assets of $20.0 billion or less as of December 31, 2017 to elect to operate with the business powers of a national bank, generally subject to the same limitations and restrictions, without converting to a national bank charter. A federal savings bank that makes the so-called “covered savings association” election must divest any activities or investments that are not permitted for a national bank. The Bank had not made such an election as of June 30, 2021.

Federal Home Loan Bank System.  The Bank is a member of the FHLB – San Francisco, which is one of 11 regional FHLBs, each of which serves as a reserve or central bank for its members within its assigned region.  The FHLB - San Francisco is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System.  It makes loans or advances to members in accordance with policies and procedures, established by the Board of Directors of the FHLB, which are subject to the oversight of the Federal Housing Finance Agency.  All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB - San Francisco.  In addition, all long-term advances are required to provide funds for residential home financing.  At June 30, 2021 and 2020, the Bank had $101.0 million and $141.0 million of outstanding advances, respectively, from the FHLB – San Francisco with a remaining available credit facility of $296.8 million and $228.1 million, respectively, based on 35% of total assets for both dates, which is limited to available collateral.  For additional information, see “Business – Deposit Activities and Other Sources of Funds – Borrowings” above in this Form 10-K.

As a member of the FHLB - San Francisco, the Bank is required to purchase and maintain stock in the FHLB – San Francisco.  At June 30, 2021 and 2020, the Bank held $8.2 million and $8.0 million of FHLB-San Francisco stock, respectively, which was in compliance with this membership requirement.  During fiscal 2021, the Bank was required to purchase $185,000 of FHLB – San Francisco capital stock as compared to a $229,000 redemption in fiscal 2020. In fiscal 2021 and 2020, the FHLB – San Francisco distributed $418,000 and $534,000 of cash dividends, respectively, to the Bank. There is no guarantee in the future that the FHLB – San Francisco will pay cash dividends or redeem excess capital stock held by its members.

Under federal law, the FHLB - San Francisco is required to contribute to low and moderately priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low and moderate income housing projects.  These contributions have in the past adversely affected the level of dividends paid by the FHLB - San Francisco and could continue to do so in the future.  These contributions also could have an adverse effect on the value of FHLB - San Francisco stock in the future.  A reduction in value of the Bank's FHLB - San Francisco stock may result in a corresponding reduction in the Bank’s capital.

Insurance of Accounts and Regulation by the FDIC.  The Deposit Insurance Fund (“DIF”) of the FDIC insures deposits up to $250,000 per account owner as defined by the FDIC, backed by the full faith and credit of the United States.  As insurer, the FDIC imposes deposit insurance premiums in the form of assessments to maintain the DIF and is authorized to conduct examinations of and to require reporting by FDIC insured institutions.

Under the FDIC’s risk-based assessment system, institutions deemed less risky of failure pay lower assessments. Assessments for institutions of less than $10 billion of assets are based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of an institution’s failure within three years.

The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of the Bank. We cannot predict what assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not know of any practice, condition or violation that may lead to termination of the Bank’s deposit insurance.

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Qualified Thrift Lender Test.  Like all savings institutions (subject to a narrow exception not applicable to the Bank), the Bank is required to meet a qualified thrift lender (“QTL”) test to avoid certain restrictions on their operations.  This test requires a savings institution to have at least 65% of its total assets as defined by regulation, in qualified thrift investments on a monthly average for nine out of every 12 months on a rolling basis.  As an alternative, a savings institution may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code of 1986 (“Code”), as amended.  Under either test, such assets primarily consist of residential housing related loans and investments.

Any savings institution that fails to meet the QTL test is subject to certain operating restrictions and may be required to convert to a national bank charter, and a savings and loan holding company of such an institution may become regulated as a bank holding company.  As of June 30, 2021, the Bank maintained 90.3% of its portfolio assets in qualified thrift investments and, therefore, met the qualified thrift lender test.  During fiscal 2021 and 2020, the Bank was in compliance with the QTL test as of each month end.

Capital Requirements. Federally insured savings institutions, such as the Bank, are required by the OCC to maintain minimum levels of regulatory capital, including a common equity Tier 1 (“CET1”) capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio, a total capital to risk-based assets ratio and a Tier 1 capital to total assets leverage ratio. The capital standards require the maintenance of the following minimum capital ratios: (i) a CET1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%.

Mortgage servicing rights and deferred tax assets over designated percentages of CET1 are also deducted from capital.  In addition, Tier 1 capital includes accumulated other comprehensive income, which includes all unrealized gains and losses on available for sale debt, equity securities and interest-only strips.  Because of the Bank’s asset size, the Bank was given a one-time option to permanently opt-out of the inclusion of unrealized gains and losses on available for sale debt, equity securities and interest-only strips in its capital calculations. The Bank elected to exercise this option to opt-out in order to reduce the impact of market volatility on its regulatory capital levels.

The Bank also must maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based capital levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. If the Bank does not have the ability to pay dividends to the Corporation, the Corporation may be limited in its ability to pay dividends to its stockholders.

In order to be considered well-capitalized under the prompt corrective action regulations, the Bank must maintain a CET1 risk-based ratio of 6.5%, a Tier 1 risk-based ratio of 8%, a total risk-based capital ratio of 10% and a leverage ratio of 5%, and the Bank must not be subject to any of certain mandates by the OCC requiring it as an individual institution to meet any specified capital level.

EGRRCPA required the federal banking agencies, including the OCC, to establish a “community bank leverage ratio” of between 8% and 10% for institutions with assets of less than $10 billion. Institutions with a capital level at or exceeding the ratio and otherwise meeting the specified requirements, and electing the alternative framework, are considered to comply with the applicable regulatory capital requirements, including the risk-based requirements. Final rules issued by the agencies established the community bank leverage ratio at 9% Tier 1 capital to total average assets, effective January 1, 2020. A qualifying institution may opt in and out of the community bank leverage ratio framework on its quarterly call report. An institution that temporarily ceases to meet any qualifying criteria is provided with a two quarter grace period to regain compliance. Failure to meet the qualifying criteria within the grace period or maintain a leverage ratio of 8% or greater requires the institution to comply with the generally applicable regulatory capital requirements.

The CARES Act lowered the community bank leverage ratio to 8%, with a federal regulation making the reduced ratio effective April 23, 2020. Another regulation was issued to transition back to the 9% community bank leverage ratio by increasing the ratio to 8.5% for calendar year 2021 and to 9% thereafter. The Company did not opt in to the community bank leverage ratio framework for the year ended June 31, 2021.

As of June 30, 2021, the most recent notification from the OCC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action.  See Note 10 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

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Prompt Corrective Action.  An institution is considered adequately capitalized if it meets the minimum capital ratios described above. The OCC is required to take certain supervisory actions against undercapitalized savings institutions, the severity of which depends upon the institution's degree of undercapitalization.  Subject to a narrow exception, the OCC is required to appoint a receiver or conservator for a savings institution that is "critically undercapitalized." OCC regulations also require that a capital restoration plan be filed with the OCC within 45 days of the date a savings institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. “Significantly undercapitalized” and “critically undercapitalized” institutions are subject to more extensive mandatory regulatory actions.  The OCC also may take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

Limitations on Capital Distributions.  OCC regulations impose various restrictions on savings institutions and on their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account.  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, without regulatory approval.  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 FRB. The FRB or the OCC may object to a capital distribution based on safety and soundness concerns.  Further restrictions on Bank dividends may apply if the Bank fails the QTL test.  In addition, as noted above, if the Bank does not have the required capital conservation buffer, its ability to pay dividends to the Corporation will be limited, which may limit the ability of the Corporation to pay dividends to its stockholders.

Activities of Savings Associations and Their Subsidiaries.  When a savings institution establishes or acquires a subsidiary or elects to conduct any new activity through a subsidiary that the savings institution controls, the savings institution must file a notice or application with the OCC and in certain circumstances with the FDIC and receive regulatory approval or non-objection. Savings institutions also must conduct the activities of subsidiaries in accordance with existing regulations and orders. With respect to subsidiaries generally, the OCC may determine that investment by a savings institution in, or the activities of, a subsidiary must be restricted or eliminated based on safety and soundness or legal reasons.

Transactions with Affiliates. The Bank’s authority to engage in transactions with “affiliates” is limited by Sections 23A and 23B of the Federal Reserve Act as implemented by the FRB’s Regulation W.  The term “affiliates” for these purposes generally mean any company that controls or is under common control with an institution except subsidiaries of the institution. The Corporation and its non-savings institution subsidiaries are affiliates of the Bank. In general, transactions with affiliates must be on terms that are as favorable to the institution as comparable transactions with non-affiliates.  In addition, certain types of transactions are restricted to an aggregate percentage of the institution’s capital.  Institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary. FDIC-insured institutions are subject, with certain exceptions, to certain restrictions on extensions of credit to their parent holding companies or other affiliates, on investments in the stock or other securities of affiliates and on the taking of such stock or securities as collateral from any borrower. Collateral in specified amounts must be provided by affiliates in order to receive loans from an institution. In addition, these institutions are prohibited from engaging in certain tying arrangements in connection with any extension of credit or the providing of any property or service.

Community Reinvestment Act and Consumer Protection Laws.  Under the Community Reinvestment Act of 1977 (“CRA”), every FDIC-insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA requires that the Federal Reserve assess the Bank's record in meeting the credit needs of the communities it serves, especially low and moderate income neighborhoods. Under the CRA, institutions are assigned a rating of "outstanding," "satisfactory," "needs to improve," or "substantial non-compliance." The Bank received a rating of satisfactory when it was last examined for CRA compliance.

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In connection with its deposit-taking, lending and other activities, the Bank is subject to a number of federal laws designed to protect consumers and promote lending for various purposes. The Consumer Financial Protection Bureau (“CFPB”) as an independent bureau of the FRB issues regulations and standards under these federal consumer protection laws, which include the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act and others. The CFPB has promulgated a number of proposed and final regulations under these laws that will affect our businesses. Among these regulatory initiatives are final regulations setting “ability to repay” and “qualified mortgage” standards for residential mortgage loans and establishing new mortgage loan servicing and loan originator compensation standards. The Bank devotes substantial compliance, legal and operational business resources to ensure compliance with applicable consumer protection standards. In addition, customer privacy regulations limit the ability of the Bank to disclose nonpublic consumer information to non-affiliated third parties. These regulations require disclosure of privacy policies and allow consumers to prevent certain personal information from being shared with non-affiliated parties.

Anti-Money Laundering and Customer Identification. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) was signed into law on October 26, 2001.  The USA Patriot Act and the Bank Secrecy Act requires financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts, and, effective in 2018, the beneficial owners of accounts. Bank regulators are directed to consider a holding company’s effectiveness in combating money laundering when reviewing mergers and acquisitions.

Regulatory and Criminal Enforcement Provisions.  The OCC has primary enforcement responsibility over federally chartered savings institutions and has the authority to bring action against all “institution-affiliated parties,” including stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution.  Formal enforcement action may range from the issuance of a capital directive or cease-and-desist order to removal of officers or directors, receivership, conservatorship or termination of deposit insurance.  Civil penalties cover a wide range of violations and can be nearly $2.0 million per day per violation in especially egregious cases.  The FDIC has the authority to recommend to the OCC that enforcement action be taken with respect to a particular savings institution.  If the OCC does not take action, the FDIC has authority to take such action under certain circumstances.  Federal law also establishes criminal penalties for certain violations.

Standards for Safety and Soundness. As required by statute, the federal banking agencies have adopted interagency guidelines prescribing standards for safety and soundness. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the OCC determines that a savings institution fails to meet any standard prescribed by the guidelines, the OCC may require the institution to submit an acceptable plan to achieve compliance with the standard.

Federal Reserve System. The FRB requires that all depository institutions maintain reserves on transaction accounts or non-personal time deposits. These reserves may be in the form of cash or non interest-bearing deposits with the regional Federal Reserve Bank. Interest-bearing checking accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to Regulation D reserve requirements, as are any non-personal time deposits at a bank. Effective March 26, 2020, due to the COVID-19 pandemic, the FRB reduced reserve requirement ratios to 0%, which eliminated reserve requirements for all depository institutions.

Environmental Issues Associated with Real Estate Lending.  The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), is a federal statute, generally imposes strict liability on all prior and present "owners and operators" of sites containing hazardous waste.  However, Congress acted to protect secured creditors by providing that the term "owner and operator" excludes a person whose ownership is limited to protecting its security interest in the site.  Since the enactment of the CERCLA, this “secured creditor exemption” has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold as collateral for a loan.

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To the extent that legal uncertainty exists in this area, all creditors, including the Bank, that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs, which costs often substantially exceed the value of the collateral property.

Privacy Regulations. Federal regulations generally require that the Bank disclose its privacy policy, including identifying with whom it shares a customer’s “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter. In addition, the Bank is required to provide its customers with the ability to “opt-out” of having their personal information shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated third parties for marketing purposes. In addition, the California Consumer Privacy Act of 2018 (the "CCPA"), which became effective on January 1, 2020, gives California residents the right to request disclosure of information collected about them, and whether that information has been sold or shared with others, the right to request deletion of personal information (subject to certain exceptions), the right to opt out of the sale of personal information, and the right not to be discriminated against for exercising these rights. The CCPA also created a private right of action with statutory damages for data security breaches, thereby increasing potential liability associated with a data breach, which has triggered a number of class actions against other companies since January 1, 2020. Although the Bank may enjoy several fairly broad exemptions from the CCPA's privacy requirements, those exemptions do not extend to the private right of action for a data security breach. The CCPA, including any amendments thereto or final regulations implemented thereunder, as well as other similar state data privacy laws and regulations, may require the establishment by the Bank of certain regulatory compliance and risk management controls. The Bank currently has a privacy protection policy in place and believes that such policy is in compliance with the regulations.

Other Consumer Protection Laws and Regulations.  The CFPB exercises broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. The Bank is subject to consumer protection regulations issued by the CFPB, but as a financial institution with assets of less than $10 billion, the Bank is generally subject to supervision and enforcement by the OCC with respect to compliance with consumer financial protection laws and CFPB regulations.

The Bank is subject to a broad array of federal and state consumer protection laws and regulations that govern almost every aspect of its business relationships with consumers. While not exhaustive, these laws and regulations include the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal and state laws prohibiting unfair and deceptive business practices and various regulations that implement some or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans and providing other services. Failure to comply with these laws and regulations can subject the Bank to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages and the loss of certain contractual rights.

Savings and Loan Holding Company Regulation

General.  The Corporation is a unitary savings and loan holding company, subject to the regulatory oversight of the FRB.  Accordingly, the Corporation is required to register and file reports with the FRB and is subject to regulation and examination by the FRB.  In addition, the FRB has enforcement authority over the Corporation and its non-savings institution subsidiaries, which also permits the FRB to restrict or prohibit activities that are determined to present a serious risk to the Bank. The FRB has promulgated regulations implementing the “source of strength” doctrine that require holding companies, including savings and loan holding companies, to act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress. These and other FRB policies, as well as the capital conservation buffer may restrict the Corporation’s ability to pay dividends.

Capital Requirements.  For a savings and loan holding company with less than $3 billion in consolidated assets that qualifies as a small bank holding company under the FRB’s Small Bank Holding Company Policy Statement, such as the Corporation, the capital regulations apply to its savings institution subsidiaries, but not the Corporation, unless the FRB

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determines otherwise in particular cases. For a description of the capital regulations, see “Federal Regulation of Savings Institutions - Capital Requirements” above.

Activities Restrictions.  The Gramm-Leach-Bliley Act of 1999 (“GLBA”) provides that no company may acquire control of a savings association after May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law or for multiple savings and loan holding companies.  The GLBA also specifies, subject to a grandfather provision, that existing savings and loan holding companies may only engage in such activities.  The Corporation qualifies for the grandfathering and is therefore not restricted in terms of its activities.  Upon any non-supervisory acquisition by the Corporation of another savings association as a separate subsidiary, the Corporation would become a multiple savings and loan holding company and would be limited to those activities permitted by FRB regulation.  Multiple savings and loan holding companies may engage in activities permitted for financial holding companies, and certain other activities including acting as a trustee under a deed of trust and real estate investments.

If the Bank fails the QTL test, the Corporation must, within one year of that failure, register as, and become subject to the restrictions applicable to bank holding companies.  For additional information, see “Federal Regulation of Savings Institutions – Qualified Thrift Lender Test” in this Form 10-K.

Mergers and Acquisitions.  The Corporation must obtain approval from the FRB before acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company or acquiring such an institution or holding company by merger, consolidation or purchase of its assets.  In evaluating an application for the Corporation to acquire control of a savings institution, the FRB would consider the financial and managerial resources and future prospects of the Corporation and the target institution, the effect of the acquisition on the risk to the DIF, the convenience and the needs of the community, including performance under the CRA and competitive factors.

The FRB may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions; (i) supervisory acquisitions and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions.  The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

Acquisition of the Company. Any company, except a bank holding company, that acquires control of a savings association or savings and loan holding company becomes a “savings and loan holding company” subject to registration, examination and regulation by the FRB and must obtain the prior approval of the FRB under the Savings and Loan Holding Company Act before obtaining control of a savings association or savings and loan holding company.  A bank holding company must obtain the prior approval of the FRB under the Bank Holding Company Act before obtaining control or more than 5% of a class of voting stock of a savings association or savings and loan holding company and remains subject to regulation under the Bank Holding Company Act.  The term “company” includes corporations, partnerships, associations, and certain trusts and other entities.  “Control” of a savings association or savings and loan holding company is deemed to exist if a company has voting control, directly or indirectly of more than 25% of any class of the savings association’s voting stock or controls in any manner the election of a majority of the directors of the savings association or savings and loan holding company, and may be presumed under other circumstances, including, but not limited to, holding in certain cases 10% or more of a class of voting securities.  Control may be direct or indirect and may occur through acting in concert with one or more other persons.  In addition, a savings and loan holding company must obtain FRB approval prior to acquiring voting control of more than 5% of any class of voting stock of another savings association or another savings association holding company.  A similar provision limiting the acquisition by a bank holding company of 5% or more of a class of voting stock of any company is included in the Bank Holding Company Act.

Accordingly, the prior approval of the FRB would be required:

● before any savings and loan holding company or bank holding company could acquire 5% or more of the common stock of the Corporation; and

● before any other company could acquire 25% or more of the common stock of the Corporation, and may be required for an acquisition of as little as 10% of such stock.

In addition, persons that are not companies are subject to the same or similar definitions of control with respect to savings and loan holding companies and savings associations and requirements for prior regulatory approval by the FRB in the

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case of control of a savings and loan holding company or by the OCC in the case of control of a savings association not obtained through control of a holding company of such savings association.

Sarbanes-Oxley Act.  The Sarbanes-Oxley Act of 2002 intended to improve corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. We have policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.

Dividends and Stock Repurchases.  The FRB’s policy statement on the payment of cash dividends applicable to savings and loan holding companies expresses its view that a savings and loan holding company must maintain an adequate capital position and generally should not pay cash dividends unless the company’s net income for the past year is sufficient to fully fund the cash dividends and that the prospective rate of earnings appears consistent with the company’s capital needs, asset quality, and overall financial condition. The FRB policy statement also indicates that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends.

In addition, a savings and loan holding company is required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding twelve months, is equal to 10% or more of its consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, FRB order or any condition imposed by, or written agreement with, the FRB. As discussed above, the capital conservation buffer requirements may also limit or preclude dividends payable by the Corporation.

TAXATION

Federal Taxation

General.  The Corporation and the Bank report their income on a fiscal year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank’s reserve for bad debts discussed below.  The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Corporation. On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Tax Act reduces the corporate federal income tax rate from a maximum of 35% to a flat 21%. The corporate federal income tax rate reduction was effective January 1, 2018. Other major changes include expensing of equipment investment; elimination of personal and dependent exemptions, the tax on people who do not obtain adequate health insurance coverage, and the corporate alternative minimum tax; and increases in the standard deduction, the estate tax exemption, and the individual alternative minimum tax exemption.

Tax Bad Debt Reserves.  As a result of legislation enacted in 1996, the reserve method of accounting for bad debt reserves was repealed for tax years beginning after December 31, 1995.  Due to such repeal, the Bank is no longer able to calculate its deduction for bad debts using the percentage-of-taxable-income or the experience method.  Instead, the Bank is permitted to deduct as bad debt expense its specific charge-offs during the taxable year.  In addition, the legislation required savings institutions to recapture into taxable income, over a six-year period, their post 1987 additions to their bad debt tax reserves.  As of the effective date of the legislation, the Bank had no post 1987 additions to its bad debt tax reserves.  As of June 30, 2021, the Bank’s total pre-1988 bad debt reserve for tax purposes was approximately $9.0 million.  Under current law, a savings institution will not be required to recapture its pre-1988 bad debt reserve unless the Bank makes a “non-dividend distribution” as defined below.  Currently, the Corporation uses the specific charge-off method to account for bad debt deductions for income tax purposes.

Distributions.  In the event that the Bank makes “non-dividend distributions” to the Corporation that are considered as made from the reserve for losses on qualifying real estate property loans, to the extent the reserve for such losses exceeds the amount that would have been allowed under the experience method or from the supplemental reserve for losses on

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loans (“Excess Distributions”), then an amount based on the amount distributed will be included in the Bank’s taxable income. Non-dividend distributions include distributions in excess of the Bank’s current and accumulated earnings and profits, distributions in redemption of stock, and distributions in partial or complete liquidation.  However, dividends paid out of the Bank’s current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Bank’s bad debt reserve.  Thus, any dividends to the Corporation that would reduce amounts appropriated to the Bank’s bad debt reserve and deducted for federal income tax purposes would create a tax liability for the Bank.  The amount of additional taxable income attributable to an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution.  Thus, if the Bank makes a “non-dividend distribution,” then approximately one and one-half times the amount distributed will be included in taxable income for federal income tax purposes.  For additional information, see "Regulation - Federal Regulation of Savings Institutions - Limitations on Capital Distributions” in this Form 10-K for limits on the payment of dividends by the Bank.  The Bank does not intend to pay dividends that would result in a recapture of any portion of its tax bad debt reserve.  During fiscal 2021, the Bank declared and paid $5.0 million of cash dividends to the Corporation while the Corporation declared and paid $4.2 million of cash dividends to shareholders.

Tax Effect from Stock-Based Compensation.  During fiscal 2021, there were 112,750 shares of restricted common stock distributed to employees but no restricted stock was distributed to non-employee members of the Corporation’s Board of Directors. Also, there were 69,164 shares of non-qualified stock options exercised while 17,255 shares of incentive stock options were exercised as disqualifying dispositions.  As a result, there was a $90,000 federal tax benefit effect from stock-based compensation in fiscal 2021.

Other Matters. 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 2016 and fiscal years thereafter remain subject to federal examination, while the California state tax returns for fiscal 2015 and fiscal years thereafter are subject to examination by state taxing authorities.

State Taxation

California.  The California franchise tax rate applicable to the Bank, equals the franchise tax rate applicable to corporations generally, plus an “in lieu” rate of 2%, which is approximately equal to personal property taxes and business license taxes paid by such corporations (but not generally paid by banks or financial corporations such as the Corporation).  At June 30, 2021 and 2020, the Corporation’s net state tax rate was 6.1% and 8.5%, respectively.  Bad debt deductions are available in computing California franchise taxes using the specific charge-off method.  The Bank and its California subsidiaries file California franchise tax returns on a combined basis.  The Corporation will be treated as a general corporation subject to the general corporate tax rate.  There was a $52,000 state tax benefit effect from stock-based compensation in fiscal 2021, as described above in the section entitled "Federal Taxation."

Delaware.  As a Delaware holding company not earning income in Delaware, the Corporation is exempted from Delaware corporate income tax, but is required to file an annual report with and pay an annual franchise tax to the State of Delaware. During both fiscal 2021 and 2020, the Corporation paid franchise taxes of $200,000.

Employees and Human Capital

As of June 30, 2021, the Bank had 161 full-time equivalent employees, which consisted of 108 full-time, 53 prime-time and no part-time employees. The employees are not represented by a collective bargaining unit and management believes that its relationship with employees is good.

To facilitate talent attraction and retention, we strive to make the Bank an inclusive, safe and healthy workplace, with opportunities for our employees to grow and develop in their careers, supported by market-based compensation, benefits, health and welfare programs. At June 30, 2021, approximately 75 percent of our workforce was female and 25 percent male, and our average tenure was approximately 10.1 years, an increase of  approximately three percent from an average tenure of 9.8 years at June 30, 2020. As part of our compensation philosophy, we offer and maintain market competitive compensation programs for our employees in order to attract and retain superior talent. In addition to strong base wages,

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additional programs include quarterly or annual bonus opportunities, an Employee Stock Ownership Plan, a Corporation-matched 401(k) Plan, healthcare and insurance benefits, flexible spending accounts, accrued vacation and sick time, family leave, and an employee assistance program.

The success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health, safety, and wellness of our employees. In support of our commitment, we provide our employees and their families with access to a variety of flexible and convenient health and welfare programs, including benefits that support their physical and mental health by providing tools and resources to help them improve or maintain their health status; and that offer choice where possible so they can customize their benefits to meet their needs and the needs of their families. In response to the COVID-19 pandemic, we implemented significant operating environment changes that we determined were in the best interest of our employees, as well as the communities in which we operate, and which comply with government regulations. This includes implementing additional safety measures for employees completing essential on-site work.

A core value of our talent management approach is to both develop talent from within and supplement with external hires. This approach has yielded loyalty and dedication in our employee base which in turn grows our business, our commitment to our communities, and our customers, while adding new employees and external ideas supports a continuous improvement mindset. We believe that our average tenure of over 10 years reflects the engagement of our employees in this talent management philosophy.

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EXECUTIVE OFFICERS

The following table sets forth information with respect to the executive officers of the Corporation and the Bank:

		Position
Name	Age(1)	Corporation	Bank
Craig G. Blunden	73	Chairman and	Chairman and
		Chief Executive Officer	Chief Executive Officer
Robert "Scott" Ritter	52	—	Senior Vice President
			Single-Family Division
Donavon P. Ternes	61	President	President
		Chief Operating Officer	Chief Operating Officer
		Chief Financial Officer	Chief Financial Officer
		Corporate Secretary	Corporate Secretary
David S. Weiant	62	—	Senior Vice President
			Chief Lending Officer
Gwendolyn L. Wertz	55	—	Senior Vice President
			Retail Banking Division

(1) As of June 30, 2021.

Biographical Information

Set forth below is certain information regarding the executive officers of the Corporation and the Bank.  There are no family relationships among or between the executive officers.

Craig G. Blunden has been associated with Provident Savings Bank since 1974, currently serving as Chairman and Chief Executive Officer of the Bank and Provident, positions he has held since 1991 and 1996, respectively. He served as President of the Bank from 1991 until June 2011 and as President of Provident from its formation in 1996 until June 2011. Mr. Blunden also serves on the Board of Directors of the Western Bankers Association.

Robert "Scott" Ritter joined the Bank as Senior Vice President on September 26, 2016 and currently oversees the single-family mortgage division.  Prior to joining the Bank, Mr. Ritter was the Chief Operating Officer at California Mortgage Advisors since November 2011 where he was responsible for overseeing all of California Mortgage Advisors' operations, including product development, underwriting, loan processing and information technology.  Prior to that, he held positions with increasing responsibilities at mortgage banking firms such as Green Point Financial and its predecessor Headlands Mortgage Company, among others.

Donavon P. Ternes joined the Bank and the Corporation as Senior Vice President and Chief Financial Officer on November 1, 2000 and was appointed Secretary of the Corporation and the Bank in April 2003.  Effective January 1, 2008, Mr. Ternes was appointed Executive Vice President and Chief Operating Officer, while continuing to serve as the Chief Financial Officer and Corporate Secretary of the Bank and the Corporation.  Effective June 27, 2011, the Board of Directors of the Bank and the Corporation promoted Mr. Ternes to serve as President of the Bank and the Corporation, while continuing to serve as Chief Operating Officer, Chief Financial Officer and Corporate Secretary.  Prior to joining the Bank, Mr. Ternes was the President, Chief Executive Officer, Chief Financial Officer and Director of Mission Savings and Loan Association, located in Riverside, California, holding those positions for over 11 years.

David S. Weiant joined the Bank as Senior Vice President and Chief Lending Officer on June 29, 2007.  Prior to joining the Bank, Mr. Weiant was a Senior Vice President of Professional Business Bank (June 2006 to June 2007) where he was responsible for commercial lending in the Los Angeles and Inland Empire regions of Southern California.

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Gwendolyn L. Wertz joined the Bank as Senior Vice President of Retail Banking on February 3, 2014.  Prior to joining the Bank, Ms. Wertz was with CommerceWest Bank where she was responsible for the management of commercial banking activities, treasury management and specialty banking.  Prior to that she was with Opportunity Bank, N.A. where she was responsible for the commercial treasury sales and service team.  Ms. Wertz has more than 30 years of experience with financial institutions including the last 15 years in senior management roles.  Her experience includes depository growth initiatives, operations, compliance, and deposit acquisition management.

Item 1A.  Risk Factors

We assume and manage a certain degree of risk in order to conduct our business.  In addition to the risk factors described below, other risks and uncertainties not specifically mentioned, or that are currently known to, or deemed by, management to be immaterial also may materially and adversely affect our financial position, results of operation and/or cash flows.  Before making an investment decision, you should carefully consider the risks described below together with all of the other information included in this Form 10-K.  If any of the circumstances described in the following risk factors actually occur to a significant degree, the value of our common stock could decline, and you could lose all or part of your investment.

Risks Related to Macroeconomic Conditions

The COVID-19 pandemic has adversely impacted our ability to conduct business and is expected to adversely impact our financial results and those of our customers. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The worldwide COVID-19 pandemic has caused major economic disruption and volatility in the financial markets both in the United States and globally and has negatively affected our operations and the banking and financial services we provide, primarily to businesses and individuals in the state of California where all of our branches are located. In our market areas, stay-at-home orders, social distancing and travel restrictions, and similar orders imposed across the United States to restrict the spread of COVID-19, resulted in significant business and operational disruptions, including business closures, supply chain disruptions, and significant layoffs and furloughs. While the stay-at-home orders have terminated or been phased-out along with reopening of businesses, some of the localities in which we operate still apply capacity restrictions and health and safety recommendations that encourage continued social distancing and working remotely, limiting the ability of businesses to return to pre-pandemic levels of activity.

The COVID-19 pandemic resulted in changes to our business operations during the last fiscal year and could continue to result in changes to operations in future periods. Currently, some of our employees are working remotely to enable us to continue to provide banking services to our customers. Heightened cybersecurity, information security and operational risks may result from these remote work-from-home arrangements. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of the COVID-19 pandemic.  We also rely upon our third-party vendors to conduct business and to process, record and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our customers. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be completely effectivein the event of widespread disruption due to the COVID-19 pandemic.

There is pervasive uncertainty surrounding the future economic conditions that will emerge in the months and years following the start of the pandemic. As a result, management is confronted with a significant and unfamiliar degree of uncertainty in estimating the impact of the pandemic on credit quality, revenues and asset values. To date, the COVID-19 pandemic has resulted in declines in loan demand and originations, deposit availability, market interest rates and negatively impacted many of our business and consumer borrower’s ability to make their loan payments. Because the length of the pandemic and the efficacy of the extraordinary measures being put in place by the government to address its economic consequences are unknown, including a continued low recent reductions in the targeted federal funds rate, until the pandemic subsides, we expect our net interest income and net interest margin will be adversely affected. Some of our borrowers have become unemployed or may face unemployment, and certain businesses are at risk of insolvency as their revenues decline precipitously, especially in businesses related to travel, hospitality, leisure and physical personal services.

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Businesses may ultimately not reopen as there is a significant level of uncertainty regarding the level of economic activity that will return to our markets over time, the impact of governmental assistance, the speed of economic recovery, the resurgence of COVID-19 in subsequent seasons and changes to demographic and social norms that will take place.

The impact of the pandemic may continue to adversely affect us during fiscal 2022 and possibly longer as the ability of many of our customers to make loan payments has been significantly affected. Although the Corporation makes estimates of loan losses related to the pandemic as part of its evaluation of the allowance for loan losses, such estimates involve significant judgment and are made in the context of significant uncertainty as to the impact the pandemic will have on the credit quality of our loan portfolio. It is possible that increased loan delinquencies, adversely classified loans and loan charge-offs will increase in the future as a result of the pandemic.  Consistent with guidance provided by banking regulators, we have modified loans by providing various loan payment deferral options to our borrowers affected by the COVID-19 pandemic. Notwithstanding these modifications, these borrowers may not be able to resume making full payments on their loans once the deferral period is over or the COVID-19 pandemic is resolved. Any increase in the allowance for credit losses will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.

Although vaccine programs addressing the COVID-19 pandemic have commenced, it is not possible to accurately predict when or the extent to which normal economic and operating conditions will resume. Recently most of our areas are reporting a fairly significant increase in COVID transmissions, which we understand from public health authorities is largely attributed to lagging vaccination rates and an increase in cases related to the Delta variant. For this reason, the extent to which the COVID-19 pandemic affects our credit quality, business, operations and financial condition, as well as our regulatory capital and liquidity ratios and credit ratings, is uncertain and unpredictable and depends on, among other things, new information that may emerge concerning the scope, duration and severity of the COVID-19 pandemic and actions taken by governmental authorities and other parties in response to the pandemic. If the pandemic is prolonged, the adverse impact on the markets in which we operate and on our business, operations and financial condition could deepen and it may also have the effect of heightening many of the other risks described below.

Our business may be adversely affected by downturns in the national economy and the regional economies on which we depend.

As of June 30, 2021, approximately 73% of our real estate loans were secured by collateral and made to borrowers located in Southern California with the balance located predominantly throughout the rest of California. Adverse economic conditions in California may reduce our rate of growth, affect our customers' ability to repay loans and adversely impact our financial condition and earnings.  General economic conditions, including inflation, unemployment and money supply fluctuations, also may adversely affect our profitability adversely.  Weakness in the global economy has adversely affected many businesses operating in our markets that are dependent upon international trade and it is not known how changes in tariffs being imposed on international trade may also affect these businesses. Changes in agreements or relationships between the United States and other countries may also affect these businesses.

A deterioration in economic conditions in the market areas we serve as a result of COVID-19 or other factors could result in the following consequences, any of which could have a materially adverse impact on our business, financial condition and results of operations:

●an increase in loan delinquencies, problem assets and foreclosures;

●we may increase our allowance for loan losses;

●the slowing of sales of foreclosed assets;

●a decline in demand for our products and services;

●a decline in the value of collateral for loans may in turn reduce customers' borrowing power, and the value of assets and collateral associated with existing loans;

●the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and

●a decrease in the amount of our low cost or non interest-bearing deposits.

A decline in California economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are more geographically diverse. Many of the

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loans in our portfolio are secured by real estate. Deterioration in the real estate markets where collateral for a mortgage loan is located could negatively affect the borrower’s ability to repay the loan and the value of the collateral securing the loan. Real estate values are affected by various other factors, including changes in general or regional economic conditions, governmental rules or policies and natural disasters such as fires and earthquakes. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected.

Risks Related to our Lending Activities

Our business may be adversely affected by credit risk associated with residential property.

At June 30, 2021, $268.3 million, or 31.5% of our loans held for investment, were secured by single-family residential real property. This type of lending is generally sensitive to regional and local economic conditions that may significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. Jumbo single-family loans which do not conform to secondary market mortgage requirements for our market areas are not immediately saleable in the secondary market and may expose us to increased risk because of their larger balances. Recessionary conditions or declines in the volume of single-family real estate sales and/or the sales prices as well as elevated unemployment rates may result in higher than expected loan delinquencies or problem assets, and a decline in demand for our products and services. These potential negative events may cause us to incur losses, adversely affect our capital and liquidity and damage our financial condition and business operations.

Some of our residential mortgage loans are secured by liens on mortgage properties in which the borrowers have little or no equity because either we originated a first mortgage with an 80% loan-to-value ratio and a concurrent second mortgage for a combined loan-to-value ratio of up to 100% or because of the decline in home values in our market areas. Residential loans with high loan-to-value ratios will be more sensitive to declining property values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses.

Prior to fiscal 2009, many of the loans we originated for investment consisted of non-traditional single-family residential loans that do not conform to Fannie Mae or Freddie Mac underwriting guidelines as a result of the characteristics of the borrower or property, the loan terms, loan size or exceptions from agency underwriting guidelines.  In exchange for the additional risk to us associated with these loans, these borrowers generally are required to pay a higher interest rate, and depending on the credit history, a lower loan-to-value ratio was generally required than for a conforming loan.  Our non-traditional single-family residential loans include loans to borrowers who provided limited or no documentation of their income or stated income loans, negative amortization loans (a loan in which accrued interest exceeding the required monthly loan payment is added to loan principal up to 115% of the original loan amount), more than 30-year amortization loans, and loans to borrowers with a FICO score below 660 (these loans are considered subprime by the OCC).  Including these low FICO score loans, as of June 30, 2021, our single-family residential borrowers had a weighted average FICO score of 751 at the time of loan origination.

As of June 30, 2021, these non-traditional loans totaled $29.2 million, comprising 10.9% of total single-family residential loans held for investment and 3.4% of total loans held for investment. At that date, stated income loans totaled $25.7 million, more than 30-year amortization loans totaled $5.8 million, and low FICO score loans totaled $2.8 million, negative amortization loans totaled $564,000 (the outstanding balances described may overlap more than one category).

Our multi-family and commercial real estate loans involve higher principal amounts than other loans and repayment of these loans may be dependent on factors outside our control or the control of our borrowers.

We originate multi-family residential and commercial real estate loans for individuals and businesses for various purposes, which are secured by residential and non-residential properties.  At June 30, 2021, we had $579.1 million or 68.0% of total loans held for investment in multi-family and commercial real estate mortgage loans.  These loans typically involve higher principal amounts than other types of loans and some of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a single-family residential loan. Repayment on these loans are dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service, which may be adversely affected by changes

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in the economy or local market conditions. For example, if the cash flow from the borrower's project is reduced as a result of leases not being obtained or renewed, the borrower's ability to repay the loan may be impaired.  Multi-family and commercial real estate loans also expose a lender to greater credit risk than loans secured by single-family residential real estate because the collateral securing these loans typically cannot be sold as easily as single-family residential real estate.  In addition, many of our multi-family and commercial real estate loans are not fully amortizing and contain large balloon payments upon maturity.  Such balloon payments may require the borrower to either sell or refinance the underlying property to make the payment, which may increase the risk of default or non-payment.  In addition, as of June 30, 2021, the Bank had $3.8 million in negative amortization multi-family mortgage loans (a loan in which accrued interest exceeding the required monthly loan payment may be added to the loan principal) as compared to $4.7 million in negative amortization multi-family loans at June 30, 2020.  Negative amortization involves a greater risk to the Bank because the credit risk exposure increases when the loan incurs negative amortization and the value of the property serving as collateral for the loan does not increase proportionally.

A secondary market for many types of multi-family and commercial real estate loans is not readily liquid, so we have less opportunity to mitigate credit risk by selling part or all of our interest in these loans. As a result of these characteristics, if we foreclose on a multi-family or commercial real estate loan, our holding period for the collateral typically is longer than for a single-family residential mortgage loan because there are fewer potential purchasers of the collateral. Accordingly, charge-offs on multi-family and commercial real estate loans may be larger on a per loan basis than those incurred with our single-family residential or consumer loan portfolios.

We occasionally purchase loans in bulk or “pools.” We may experience lower yields or losses on loan “pools” because the assumptions we use when purchasing loans in bulk may not prove correct.

In order to achieve our loan growth objectives and/or improve earnings, we may purchase loans, either individually, through participations, or in bulk. The Corporation purchased $16.9 million and $142.1 million of primarily multi-family and single-family loans to be held for investment in fiscal 2021 and 2020, respectively.  When we determine the purchase price we are willing to pay to purchase loans in bulk, management makes certain assumptions about, among other things, how fast borrowers will prepay their loans, the real estate market, our ability to collect loans successfully and, if necessary, our ability to dispose of any real estate that may be acquired through foreclosure. When we purchase loans in bulk, we perform certain due diligence procedures and typically require customary limited indemnities. To the extent that our underlying assumptions prove to be inaccurate or the basis for those assumptions change, the purchase price paid for “pools” of loans may prove to have been excessive, resulting in a lower yield or a loss of some or all of the loan principal. For example, if we purchase pools of loans at a premium and some of the loans are prepaid before we expected we will earn less interest income on the purchase than expected. Our success in growing through purchases of loan “pools” depends on our ability to price loan “pools” properly and on the general economic conditions within the geographic areas where the underlying properties of our loans are located.

Acquiring loans through bulk purchases may involve acquiring loans of a type or in geographic areas where management may not have substantial prior experience. We may be exposed to a greater risk of loss to the extent that bulk purchases contain such loans.

Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.

Lending money is a substantial part of our business and each loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:

●cash flow of the borrower and/or the project being financed;

●the changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan;

●the duration of the loan;

●the character and creditworthiness of a particular borrower; and

●changes in economic and industry conditions.

We maintain an allowance for loan losses, which is a reserve established through a provision (recovery) for loan losses charged (credited) to expense, which we believe is appropriate to provide for probable losses in our loan portfolio. The

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amount of this allowance is determined by management through periodic reviews and consideration of several factors, including, but not limited to:

● our collectively evaluated allowance, based on our historical default and loss experience and certain macroeconomic factors based on management's expectations of future events;

● our individually evaluated allowance, based on our evaluation of non-performing loans and the underlying fair value of collateral or based on discounted cash flow for restructured loans; and

● an unallocated reserve to provide for other credit losses inherent in our loan portfolio that may not have been contemplated in the other loss factors.

The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans, losses, and delinquency experience, and evaluate economic conditions and make significant estimates of current credit risks and future trends, all of which may undergo material changes. If our estimates are incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in the need for additions to our allowance through an increase in the provision for loan losses, which is charged against income.  Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the provision for loan losses and our allowance for loan losses.  Further, included in our single-family residential loan portfolio, which comprised 31.5% of our total loan portfolio at June 30, 2021, were $29.2 million or 3.4% of total loans held for investment that were non-traditional single-family loans, which include negative amortization and more than 30-year amortization loans, stated income loans and low FICO score loans, all of which have a higher risk of default and loss than conforming residential mortgage loans.  For additional information, see “Our business may be adversely affected by credit risk associated with residential property” above.  Management also recognizes that significant new growth in loan portfolios, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner and will increase the risk that our allowance may be insufficient to absorb losses without significant additional provisions. Furthermore, the Financial Accounting Standards Board (“FASB”) has adopted a new accounting standard, ASC 326 Current Expected Credit Losses (“CECL”), that will be effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019, however, the FASB board in July 2019 extended the adoption date for certain SEC registrants, including the Corporation, to fiscal years, including interim periods within those fiscal years, beginning after December 15, 2022. This standard will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for credit losses at inception of the loan. This will change the current method of calculating allowances for credit losses that are probable, which may require us to increase our allowance for loan losses, and may greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for credit losses. The federal banking regulators (the FRB, the OCC and the FDIC) have adopted a rule that applies to smaller reporting companies, such as the Corporation, beginning in 2023. In addition, a further decline in national and local economic conditions, including as a result of the COVID-19 pandemic, results of the bank regulatory agencies periodic review of our allowance for loan losses or other factors and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs.  If charge-offs in future periods exceed the allowance for loan losses, we may need additional provisions to increase the allowance for loan losses. Any increases in the provision for loan losses will result in a decrease in net income and may have a material adverse effect on our financial condition, results of operations and capital.

If our non-performing assets increase, our earnings will be adversely affected.

At June 30, 2021 and 2020, our non-performing assets were $8.6 million and $4.9 million, respectively, or 0.73% and 0.42% of total assets, respectively.  Our non-performing assets adversely affect our net income in various ways:

● we record interest income only on a cash basis for non-performing loans except for non-performing loans under the cost recovery method where interest is applied to the principal of the loan as a recovery of the charge-offs, if any, and we do not record interest income for REO;

● we must provide for probable loan losses through a current period charge to the provision for loan losses;

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● non-interest expense increases when we write down the value of properties in our REO portfolio to reflect changing market values or recognize other-than-temporary impairment (“OTTI”) on non-performing investment securities;

● there are legal fees associated with the resolution of problem assets, as well as carrying costs, such as taxes, insurance, and maintenance fees related to our REO; and

● the resolution of non-performing assets requires the active involvement of management, which can divert them from more profitable activity.

If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our non-performing assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our financial condition and results of operations.

If our investments in real estate are not properly valued or sufficiently reserved to cover actual losses, or if we are required to increase our valuation reserves, our earnings could be reduced.

We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed upon and the property is taken in as REO and at certain other times during the REO holding period.  Our net book value (“NBV”) in the loan at the time of foreclosure and thereafter is compared to the updated market value of the foreclosed property less estimated selling costs (“fair value”). A charge-off is recorded for any excess in the asset's NBV over its fair value.  If our valuation process is incorrect, the fair value of the investments in real estate may not be sufficient to recover our NBV in such assets, resulting in the need for additional charge-offs. Additional material charge-offs to our investments in real estate could have a material adverse effect on our financial condition and results of operations.

In addition, bank regulators periodically review our REO and may require us to recognize further charge-offs.  Any increase in our charge-offs, as required by the bank regulators, may have a material adverse effect on our financial condition and results of operations.

Risks Related to Market and Interest Rate Changes

Fluctuating interest rates can adversely affect our profitability.

Our earnings and cash flows are largely dependent upon our net interest income.  Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the FRB. In response to the COVID-19 pandemic, the FRB decreased the target federal funds rate by 150 basis points to a range of 0.00% to 0.25%. The FRB could make additional changes in interest rates during fiscal 2022 subject to economic conditions. If the FRB changes the targeted Fed Funds rate, overall interest rates will likely rise or fall, which may negatively impact the housing markets and the U.S. economic recovery. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of collateral securing loans, which could negatively affect our financial performance.

We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings, but these changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities, which could negatively impact shareholders' equity, and our ability to realize gains from the sale of such assets; (iii) our ability to obtain and retain deposits in competition with other available investment alternatives; (iv) the ability of our borrowers to repay adjustable or variable rate loans; and (v) the average duration of our investment  securities portfolio and other interest-earning assets.  If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments decline more rapidly than the interest rates paid on deposits and other borrowings. In a changing interest rate environment, we may not be able to manage this risk effectively. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially affected.

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A sustained increase in market interest rates could adversely affect our earnings. As is the case with many financial institutions, our emphasis on increasing the development of core deposits, those deposits bearing no or a relatively low rate of interest with no stated maturity date, has resulted in our having a significant amount of these deposits bearing a relatively low rate of interest and having a shorter duration than our assets. At June 30, 2021, we had $76.7 million in time deposits that mature within one year, $123.2 million in non-interest bearing checking accounts and $674.4 million in interest-bearing checking, savings and money market accounts.  We would incur a higher cost of funds to retain these deposits in a rising interest rate environment.  Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.  In addition, most of our mortgage loans have adjustable interest rates.  As a result, these loans may experience a higher rate of default in a rising interest rate environment.

Changes in interest rates also affect the value of our interest-earning assets and, in particular, our securities portfolio.  Generally, the fair value of fixed-rate securities fluctuates inversely with changes in interest rates.  Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net of tax.  Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on stockholders’ equity.

Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations. Also, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our consolidated balance sheet or projected operating results. In this regard, because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including the March 2020 150 basis point reductions in the targeted federal funds rate, until the pandemic subsides, the Company expects its net interest income and net interest margin will be adversely affected in fiscal 2022 and possibly longer. For additional information concerning the effect of interest rates on our loan portfolio, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” of this Form 10-K.

Certain hedging strategies that we use to manage investment in mortgage servicing rights, mortgage loans held for sale and interest rate lock commitments may be ineffective to offset any adverse changes in the fair value of these assets due to changes in interest rates and market liquidity.

We use derivative instruments to economically hedge mortgage servicing rights, mortgage loans held for sale and interest rate lock commitments to offset changes in fair value resulting from changing interest rate environments. Our hedging strategies are susceptible to prepayment risk, basis risk, market volatility and changes in the shape of the yield curve, among other factors. In addition, hedging strategies rely on assumptions and projections regarding assets and general market factors. If these assumptions and projections prove to be incorrect or our hedging strategies do not adequately mitigate the impact of changes in interest rates, we may incur losses that would adversely impact earnings.

Our securities portfolio may be negatively impacted by fluctuations in market value and interest rates.

Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand. Our securities portfolio is evaluated for other-than-temporary impairment. If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities, a potential loss to earnings may occur. Changes in interest rates can also have an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates. We increase or decrease our shareholders' equity by the amount of change in the estimated fair value of the available-for-sale securities, net of taxes. There can be no assurance that the declines in market value, including as a result of the COVID-19 pandemic, will not result in other-than-temporary impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our results of operations and capital levels.

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Risks Related to Regulatory, Legal and Compliance Matters

Non-compliance with the USA Patriot Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions and limit our ability to get regulatory approval of acquisitions.

The USA Patriot and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities.  If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network.  These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts.  Failure to comply with these regulations could result in fines or sanctions and limit our ability to get regulatory approval of acquisitions.  Several banking institutions have received large fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations.

If our enterprise risk management framework is not effective at mitigating risk and loss to us, we could suffer unexpected losses and our results of operations could be materially adversely affected.

Our enterprise risk management framework seeks to achieve an appropriate balance between risk and return, which is critical to optimizing stockholder value. We have established processes and procedures intended to identify, measure, monitor, report, analyze, and control the types of risk to which we are subject to.  These risks include, among others, liquidity, credit, market, interest rate, operational, legal and compliance, and reputational risk.  Our framework also includes financial or other modeling methodologies that involve management assumptions and judgment. We also maintain a compliance program to identify, measure, assess, and report on our adherence to applicable laws, policies, and procedures. While we assess and improve these programs on an ongoing basis, there can be no assurance that our risk management or compliance programs, along with other related controls, will effectively mitigate risk under all circumstances,  or that it will adequately mitigate any risk or loss to us.  However, as with any risk management framework, there are inherent limitations to our risk management strategies as they may exist, or develop in the future, including risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could suffer unexpected losses and our business, financial condition, results of operations or growth prospects could be materially adversely affected. We may also be subject to potentially adverse regulatory consequences.

Our litigation related costs may increase.

The Bank is subject to a variety of legal proceedings that have arisen in the ordinary course of the Bank's business. The Bank's involvement in litigation may increase significantly. The expenses of some legal proceedings will adversely affect the Bank’s results of operations until they are resolved. Further, there can be no assurance that the Bank’s loan workout and other activities will not expose the Bank to additional legal actions, including lender liability or environmental claims.

Risks Related to Cybersecurity, Data and Fraud

We are subject to certain risks in connection with our use of technology.

Our security measures may not be sufficient to mitigate the risk of a cyber attack. Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger and virtually all other aspects of our business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to breaches, fraudulent or unauthorized access, denial or degradation of service attacks, misuse, computer viruses, malware or other malicious code and cyber-attacks that could have a security impact. If one or more of these events occur, this could jeopardize our or our customers' confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we

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may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant reputational damage.

Further, our cardholders use their debit and credit cards to make purchases from third parties or through third party processing services. As such, we are subject to risk from data breaches of such third party’s information systems or their payment processors. Such a data security breach could compromise our account information. The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems. If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data is compromised due to a breach or misuse of data, we may be liable for losses associated with reimbursing our customers for such fraudulent transactions on customers’ card accounts, as well as costs incurred by payment card issuing banks and other third parties or may be subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. We may also incur other costs related to data security breaches, such as replacing cards associated with compromised card accounts. In addition, our customers could lose confidence in certain payment types, which may result in a shift to other payment types or potential changes to our payment systems that may result in higher costs.

Breaches of information security also may occur through intentional or unintentional acts by those having access to our systems or our customers’ or counterparties’ confidential information, including employees. The Corporation is continuously working to install new and upgrade its existing information technology systems and provide employee awareness training around ransomware, phishing, malware, and other cyber risks to further protect the Corporation against cyber risks and security breaches.

There continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting commercial bank accounts. We are regularly the target of attempted cyber and other security threats and must continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact. Insider or employee cyber and security threats are increasingly a concern for companies, including ours. We are not aware that we have experienced any material misappropriation, loss or other unauthorized disclosure of confidential or personally identifiable information as a result of a cyber-security breach or other act, however, some of our customers may have been affected by these breaches, which could increase their risks of identity theft, debit and card fraud and other fraudulent activity that could involve their accounts with us.

Security breaches in our internet banking activities could further expose us to possible liability and damage our reputation. Increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our customers and underlying transactions. Any compromise of our security could deter customers from using our internet banking services that involve the transmission of confidential information. We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. Although we have developed and continue to invest in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security, these precautions may not protect our systems from compromises or breaches of our security measures, and could result in losses to us or our customers, our loss of business and/or customers, damage to our reputation, the incurrence of additional expenses, disruption to our business, our inability to grow our online services or other businesses, additional regulatory scrutiny or penalties, or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations.

Our security measures may not protect us from system failures or interruptions. While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers. While the Corporation selects third-party vendors carefully, it does not control their actions. If our third-party providers encounter difficulties including those resulting from breakdowns or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher transaction volumes, cyber-attacks and security breaches or if we otherwise have difficulty in

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communicating with them, our ability to adequately process and account for transactions could be affected, and our ability to deliver products and services to our customers and otherwise conduct business operations could be adversely impacted. Replacing these third-party vendors could also entail significant delay and expense. Threats to information security also exist in the processing of customer information through various other vendors and their personnel. We cannot assure that such breaches, failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely. We may not be insured against all types of losses as a result of third party failures and insurance coverage may be inadequate to cover all losses resulting from breaches, system failures or other disruptions. If any of our third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to identify alternative sources of such services, and we cannot assure that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all. Further, the occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.

The board of directors oversees the risk management process, including the risk of cybersecurity, and engages with management on cybersecurity issues.

Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.

As a bank, we are susceptible to fraudulent activity that may be committed against us or our clients, which may result in financial losses or increased costs to us or our customers, disclosure or misuse of our information or our customer’s information, misappropriation of assets, privacy breaches against our customers, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Nationally, reported incidents of fraud and other financial crimes have increased. We have also experienced losses due to apparent fraud and other financial crimes. While we have policies and procedures designed to prevent such losses, there can be no assurance that such losses will not occur.

Risks related to our Business and Industry Generally

We will be required to transition from the use of the LIBOR interest rate index in the future.

A majority of our loans are indexed to LIBOR to calculate the loan interest rate. LIBOR will be discontinued on December 31, 2021. Although we expect that the capital and debt markets will cease to use LIBOR as a benchmark in the near future and the administrator of LIBOR has announced its intention to extend the publication of most tenors of LIBOR for U.S. dollars through June 30, 2023, we cannot predict whether or when LIBOR will actually cease to be available, whether the SOFR will become the market benchmark in its place or what impact such a transition may have on our business, financial condition and results of operations.

At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR. Regulators, industry groups and certain committees (e.g. the Alternative Reference Rates Committee) have published recommended fallback language for LIBOR-linked financial instruments, identified recommended alternatives for the LIBOR such as SOFR, and proposed implementations of the recommended alternatives in floating-rate financial instruments. At this time, it is not possible to predict whether these specific recommendations and proposals will be broadly accepted. The implementation of a substitute index or indices for the calculation of interest rates under our loan agreements with our borrowers may result in our incurring significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept the substitute index or indices, and may result in disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute index or indices, which could have an adverse effect on our results of operations.

Ineffective liquidity management could adversely affect our financial results and condition.

Effective liquidity management is essential to our business. We require sufficient liquidity to meet customer loan requests, customer deposit maturities and withdrawals, payments on our debt obligations as they come due and other cash commitments under both normal operating conditions and other unpredictable circumstances, including events causing industry or general financial market stress. An inability to raise funds through deposits, borrowings or other sources could

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have a substantial negative effect on our liquidity.  Our access to funding sources in amounts adequate to finance our activities or the terms of which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general.  Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the California markets in which our loans are concentrated or adverse regulatory action against us.  Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry.  Deposit flows, calls of investment securities and wholesale borrowings, and the prepayment of loans and mortgage-related securities are also strongly influenced by such external factors as the direction of interest rates, whether actual or perceived, and competition for deposits and loans in the markets we serve. In particular, our liquidity position could be significantly constrained if we are unable to access funds from the FHLB-San Francisco or other wholesale funding sources, or if adequate financing is not available at acceptable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources, our revenues may not increase proportionately to cover our costs. Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could, in turn, have a material adverse effect on our business, financial condition and results of operations.

We rely on other companies to provide key components of our business infrastructure.

We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements because of changes in the vendor’s organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our operations, which in turn could have a material negative impact on our financial condition and results of operations. We also could be adversely affected to the extent such an agreement is not renewed by a third party vendor or is renewed on terms less favorable to us. Additionally, the bank regulatory agencies expect financial institutions to be responsible for all aspects of our vendors’ performance, including aspects which they delegate to third parties. Disruptions or failures in the physical infrastructure or operating systems that support our business and customers, or cyber-attacks or security breaches of the networks, systems or devices that our customers use to access our products and services could result in customer attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition.

Managing reputational risk is important to attracting and maintaining customers, investors and employees.

Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of our customers.  We have policies and procedures in place to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully effective.  Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental regulation.

Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.

We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside of our control, and on our financial condition and performance. Accordingly, we cannot make assurances that we will be able to raise additional capital if needed on terms that are acceptable to us, or at all. If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, any additional capital we obtain may result in the dilution of the interests of existing holders of our common stock. Further, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse regulatory action.

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The financial services market is undergoing rapid technological changes, and if we are unable to stay current with those changes, we will not be able to effectively compete.

The financial services market is undergoing rapid changes with frequent introductions of new technology-driven products and services. Our future success will depend, in part, on our ability to keep pace with the technological changes and to use technology to satisfy and grow customer demand for our products and services and to create additional efficiencies in our operations. We expect that we will need to make substantial investments in our technology and information systems to compete effectively and to stay current with technological changes. Some of our competitors have substantially greater resources to invest in technological improvements and will be able to invest more heavily in developing and adopting new technologies, which may put us at a competitive disadvantage. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. As a result, our ability to effectively compete to retain or acquire new business may be impaired, and our business, financial condition or results of operations may be adversely affected.

Earthquakes, fires, mudslides and other natural disasters in our primary market area may result in material losses because of damage to collateral properties and borrowers' inability to repay loans.

Since our geographic concentration is in California, we are subject to earthquakes, fires, mudslides and other natural disasters. A major earthquake or other natural disaster may disrupt our business operations for an indefinite period of time and could result in material losses, although we have not experienced any losses in many years as a result of earthquake damage or other natural disaster. Although we are in an earthquake prone area, we and other lenders in the market area may not require earthquake insurance as a condition of making a loan.  In addition to possibly sustaining damage to our own properties, if there is a major earthquake, fire, mudslide, or other natural disaster, we face the risk that many of our borrowers may experience uninsured property losses, or sustained job interruption and/or loss which may materially impair their ability to meet the terms of their loan obligations.

Any breach of representations and warranties made by us to our loan purchasers or credit default on our loan sales may require us to repurchase or substitute such loans we have sold.

We have previously engaged in bulk loan sales pursuant to agreements that generally require us to repurchase or substitute loans in the event of a breach of a representation or warranty made by us to the loan purchaser. Any misrepresentation during the mortgage loan origination process or, in some cases, upon any fraud or early payment default on such mortgage loans, may require us to repurchase or substitute loans. Any claims asserted against us in the future by one of our loan purchasers may result in liabilities or legal expenses that could have a material adverse effect on our results of operations and financial condition. During fiscal 2021, the Bank did not repurchase any loans as compared to $1.1 million of single family loans in fiscal 2020. Additionally, the Bank settled a repurchase clain for previously sold loans for $175,000 during fiscal 2021 and no such claims were settled during fiscal 2020.

Our assets as of June 30, 2021 include a deferred tax asset, the full value of which we may not be able to realize.

We recognize deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities.  At June 30, 2021, the net deferred tax asset was approximately $2.5 million, a decrease from $3.0 million at the prior fiscal year end.  The net deferred tax asset results primarily from (1) deferred loan costs, (2) provisions for loan losses recorded for financial reporting purposes, which were in the past significantly larger than net loan charge-offs deducted for tax reporting proposes and (3) deferred compensation, among others.

We regularly review our deferred tax assets for recoverability based on our history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income, including taxable income in prior carryback years, as well as future taxable income. We believe the recorded net deferred tax asset at June 30, 2021 is fully realizable based on our expected future earnings; however, expected future earnings may not be realized, which could impact our deferred tax assets.

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We rely on dividends from the Bank for substantially all of our revenue at the holding company level.

We are an entity separate and distinct from our principal subsidiary, the Bank, and derive substantially all of our revenue at the holding company level in the form of dividends from that subsidiary. Accordingly, we are, and will be, dependent upon dividends from the Bank to pay the principal of and interest on our indebtedness, to satisfy our other cash needs and to pay dividends on our common stock. The Bank's ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements. In the event the Bank is unable to pay dividends to us, we may not be able to pay dividends on our common stock. Also, our right to participate in a distribution of assets upon a subsidiary's liquidation or reorganization is subject to the prior claims of the subsidiary's creditors.

Item 1B.  Unresolved Staff Comments

None.

Item 2.  Properties

At June 30, 2021, the net book value of the Bank’s property (including land and buildings) and its furniture, fixtures and equipment was $7.3 million. The Bank’s home office is located in Riverside, California.  Including the home office, the Bank has 13 retail banking offices, 12 of which are located in Riverside County in the cities of Riverside (5), Moreno Valley, Hemet, Sun City, Rancho Mirage, Corona, Temecula and Blythe. One office is located in Redlands, San Bernardino County, California. The Bank owns six of the retail banking offices and has seven leased retail banking offices.  The leases expire from 2022 to 2026. In the opinion of management, all properties are adequately covered by insurance, are in a good state of repair and are appropriately designed for their present and future use.

Item 3.  Legal Proceedings

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.

Item 4.  Mine Safety Disclosures

Not applicable.

PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The common stock of Provident Financial Holdings, Inc. is listed on the NASDAQ Global Select Market under the symbol PROV. At June 30, 2021, there were 7,436,315 shares of common stock issued and outstanding held by 436 shareholders of record, and there were approximately 1,746 persons or entities that hold stock in nominee or “street name” accounts with brokers.

The Corporation’s cash dividend payout policy is reviewed regularly by management and the Board of Directors.  The Board of Directors has declared quarterly cash dividends on the Corporation’s common stock for consecutive quarters

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since September 30, 2002. On July 22, 2021, the Corporation declared a quarterly cash dividend of $0.14 per share with a record date on August 12, 2021 and the dividend was paid on September 2, 2021.  Future declarations or payments of dividends will be subject to the consideration of the Corporation’s Board of Directors, which will take into account the Corporation’s financial condition, results of operations, tax considerations, capital requirements, industry standards, legal restrictions, 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.

The Corporation repurchases its common stock consistent with Board-approved stock repurchase plans. During the quarter ended June 30, 2021, the Corporation purchased 81,828 shares of the Corporation’s common stock with an average cost of $16.96 per share, including 31,553 shares with an average cost of $17.40 per share of distributed restricted stock in settlement of employees’s withholding tax obligations. For the fiscal year ended June 30, 2021, the Corporation purchased 139,596 shares of the Corporation’s common stock at an average cost of $16.73 per share, including 34,614 shares with an average cost of $16.92 per share of distributed restricted stock in settlement of employees’s withholding tax obligations. As of June 30, 2021, 104,982 shares with an average cost of $16.67 per share have been repurchased under the April 2020 stock repurchase plan, leaving 266,833 shares available for future purchases.

During the quarter ended June 30, 2021, the Corporation issued 3,000 shares of common stock from the exercise of certain stock options and 103,750 shares of restricted common stock vested. For the fiscal year ended June 30, 2021, the Corporation issued 132,000 shares of common stock consistent with the exercise of certain stock options and 112,750 shares of restricted common stock vested. During the quarter and fiscal year ended June 30, 2021, the Corporation did not sell any securities that were not registered under the Securities Act of 1933.

The table below sets forth information regarding the Corporation’s purchases of its common stock during the fourth quarter of fiscal 2021.

					(d) Maximum
				(c) Total Number of	Number of Shares
				Shares Purchased as	that May Yet Be
	(a) Total Number of	(b) Average Price		Part of Publicly	Purchased Under
Period	Shares Purchased	Paid per Share		Announced Plan	the Plan(1)
April 1, 2021 – April 30, 2021	5,581	$	16.23	5,581	311,527
May 1, 2021 – May 31, 2021	35,254	$	16.47	35,254	276,273
June 1, 2021 – June 30, 2021	40,993	$	17.48	9,440	266,833
Total	81,828	$	16.96	50,275	266,833

(1) Represents the remaining shares available for future purchases under the April 2020 stock repurchase plan.

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Performance Graph

The following graph compares the cumulative total shareholder return on the Corporation’s common stock with the cumulative total return of the Nasdaq Stock Index (U.S. Stock) and Nasdaq Bank Index.  Total return assumes the reinvestment of all dividends.

COMPARISON OF CUMULATIVE TOTAL RETURNS⁽¹⁾

	6/30/2016		6/30/2017		6/30/2018		6/30/2019		6/30/2020		6/30/2021
PROV	$	100.00	$	108.12	$	110.44	$	125.15	$	82.44	$	110.32
NASDAQ Stock Index	$	100.00	$	118.61	$	136.21	$	148.46	$	158.79	$	229.40
NASDAQ Bank Index	$	100.00	$	146.59	$	162.54	$	161.76	$	125.00	$	216.08

(1) Assumes that the value of the investment in the Corporation’s common stock and each index was $100 on June 30, 2016 and that all dividends were reinvested.

For additional information, see Part III, Item 12 of this Form 10-K for information regarding the Corporation’s Equity Compensation Plans, which is incorporated into this Item 5 by reference.

Item 6.  Selected Financial Data

The information contained under the heading “Financial Highlights” in the Corporation’s Annual Report to Shareholders is included as Exhibit 13 to this Form 10-K and is incorporated herein by reference. This information is qualified in its entirety by the detailed information included elsewhere herein and should be read along with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8. “Financial Statements and Supplementary Data” included in this Form 10-K.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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. 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.  Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Corporation. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements.  Factors which could cause actual results to differ materially include, but are not limited to the following: the effect of the COVID-19 pandemic, including on the Corporation’s credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity; the credit risks of lending activities, including changes in the level and trend of loan delinquencies and charge-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the residential and commercial real estate markets and may lead to increased losses and non-performing assets and may result in our allowance for loan losses not being adequate to cover actual losses and require us to materially increase our reserve; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; uncertainty regarding the future of LIBOR, and the potential transition away from LIBOR toward new interest rate benchmarks; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; results of examinations of the Corporation by the FRB or of the Bank by the OCC or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to enter into a formal enforcement action or to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements and restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules, including as a result of Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the California Consumer Privacy Act and the implementing regulations; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; our ability to attract and retain deposits; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired or may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; our ability to manage loan delinquency rates; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common stock; 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; including as a result of the CARES Act as amended by the CAA and the related Interagency Statement; war or terrorist activities; and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services, including as a result of COVID-19 and recent COVID-19 vaccination and economic stimulus efforts, and other risks detailed in this report and in the Corporation’s other reports filed with or furnished to the U.S. Securities and Exchange Commission (“SEC”).  These developments could have an adverse impact on our financial position and our results of operations. Forward-looking statements are based upon

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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.

General

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, 2021, the Corporation had total assets of $1.18 billion, total deposits of $938.0 million and total stockholders’ equity of $127.3 million.  The Corporation 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.

The Bank, founded in 1956, is a federally chartered stock savings bank headquartered in Riverside, California.  The Bank is regulated by the OCC, its primary federal regulator, and the FDIC, the insurer of its deposits.  The Bank’s deposits are federally insured up to applicable limits by the FDIC.  The Bank has been a member of the Federal Home Loan Bank System since 1956.

The Corporation operates in a single business segment through the Bank. The Bank's activities include attracting deposits, offering banking services and originating and purchasing single-family, multi-family, commercial real estate, construction and,  to a lesser extent, other mortgage, commercial business and consumer loans. Deposits are collected primarily from 13 banking locations located in Riverside and San Bernardino counties in California. Loans are primarily originated and purchased in Southern and Northern California to be held for investment. There are various risks inherent in the Corporation’s business including, among others, the general business environment, interest rates, the California real estate market, the demand for loans, the prepayment of loans, the repurchase of loans previously sold to investors, the secondary market conditions to sell loans, competitive conditions, legislative and regulatory changes, fraud and other risks.

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding the financial condition and results of operations of the Corporation.  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

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

The allowance is based on two principles of accounting:  (i) ASC 450, “Contingencies,” which requires that losses be accrued when they are probable of occurring and can be estimated; and (ii) ASC 310, “Receivables.”  The allowance has two components: collectively evaluated allowances and individually evaluated allowances on loans held for investment.  Each of these components is based upon estimates that can change over time.  The allowance is based on historical experience and as a result can differ from actual losses incurred in the future.  Additionally, differences may

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result from changes to qualitative factors such as unemployment data, gross domestic product, interest rates, retail sales, the value of real estate and real estate market conditions.  The historical data is reviewed at least quarterly and adjustments are made as needed.  Various techniques are used to arrive at an individually evaluated allowance, including discounted cash flows and the fair market value of collateral.  Management considers, based on currently available information, the allowance for loan losses sufficient to absorb probable losses inherent in loans held for investment.  The use of these techniques is inherently subjective and the actual losses could be greater or less than the estimates, which, can materially affect amounts recognized in the Consolidated Statements of Financial Condition and Consolidated Statements of Operations.

The Corporation assesses loans individually and classifies loans when the accrual of interest has been discontinued, loans have been restructured or management has serious doubts about the future collectability of principal and interest, even though the loans may currently be performing.  Factors considered in determining classification include, but are not limited to, expected future cash flows, the financial condition of the borrower and current economic conditions.  The Corporation measures each non-performing loan based on the fair value of its collateral, less selling costs, or discounted cash flow and charges off those loans or portions of loans deemed uncollectible.

Non-performing loans are charged-off to their fair 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 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.  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, an individually evaluated allowance is calculated based on the loan's fair value and if the fair value is higher than the individual loan balance, no allowance is required.

A troubled debt restructuring (“restructured loan”) is a loan which the Corporation, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Corporation would not otherwise consider.

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; and

●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 determined it was appropriate to maintain certain restructured loans on accrual status because there is reasonable assurance of repayment and performance, consistent with the modified terms based upon a current, well-documented credit evaluation.

Other restructured loans are classified as “Substandard” and placed on non-performing status.  The loans may be upgraded and placed on accrual status once there is a sustained period of payment performance (usually six months or, for loans that have been restructured more than once, 12 months) and there is a reasonable assurance that the payments will continue; and if the borrower has demonstrated satisfactory contractual payments beyond 12 consecutive months, the loan is no longer categorized as a restructured loan.  In addition to the payment history described above, multi-family, commercial real estate, construction and commercial business loans must also demonstrate a combination of corroborating

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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.

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

When a loan is categorized as non-performing, all previously accrued but uncollected interest is reversed in the current operating results.  When a full recovery of the outstanding principal loan balance is in doubt, subsequent payments received are first applied as a recovery of principal charged-off and then to unpaid principal.  This is referred to as the cost recovery method.  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.  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.

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.  These differences result in deferred tax assets and liabilities, which are included in the Corporation’s Consolidated Statements of Financial Condition.  The application of income tax law is inherently complex.  Laws and regulations in this area are voluminous and are often ambiguous.  As such, management is required to make many subjective assumptions and judgments regarding the Corporation’s income tax exposures, including judgments in determining the amount and timing of recognition of the resulting deferred tax assets and liabilities, including projections of future taxable income.  Interpretations of and guidance surrounding income tax laws and regulations change over time.  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 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.  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

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deposits in its deposit base and to increase the percentage of lower cost checking and savings accounts.  This strategy is intended to improve core revenue through a higher net interest margin and ultimately, coupled with the growth of the Corporation, an increase in net interest income. While the Corporation’s long-term strategy is for moderate growth, management recognizes that growth may be difficult as a result of weaknesses in general economic conditions. Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown until the pandemic subsides, the Corporation expects its net interest income and net interest margin will be adversely affected in fiscal 2022 and possibly longer.

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.

There are a number of risks associated with the business activities of the Corporation, many of which are beyond the Corporation’s control, including: changes in accounting principles, laws, regulation, interest rates and the economy, among others.  The Corporation attempts to mitigate many of these risks through prudent banking practices, such as interest rate risk management, credit risk management, operational risk management, and liquidity risk management.  The California economic environment presents heightened risk for the Corporation primarily with respect to real estate values and loan delinquencies. Since the majority of the Corporation’s loans are secured by real estate located within California, significant declines in the value of California real estate may also inhibit the Corporation’s ability to recover on defaulted loans by selling the underlying real estate. For further details on risk factors and uncertainties, see “Safe-Harbor Statement” included above in this item 7, and Item 1A, "Risk Factors.”

COVID-19 Impact to the Corporation

The Corporation is actively monitoring and responding to the effects of the rapidly-changing COVID-19 pandemic. The Centers of Disease Control and Prevention (“CDC”) guidelines, as well as directives from federal, state, county and local officials, are being closely followed to make informed operational decisions.

During the COVID-19 pandemic, the health, safety and well-being of its customers, employees and communities and providing uninterrupted access to services are top priorities for the Corporation. All of the Corporation’s banking centers are open for business with regular business hours while implementing CDC guidelines and enhanced cleaning. Customers can also conduct their banking business using drive thrus, online and mobile banking services, ATMs, and telephone banking. The Corporation is aware of the recent surge in COVID-19 infections arising out of the so-called Delta variant and is prepared to restore social distancing and other protocols, as may prove to be necessary.

As of June 30, 2021, the Corporation had three single-family forbearance loans, with outstanding balances of $897,000 or 0.11 percent of total loans and one commercial real estate loan with an outstanding balance of $945,000 or 0.11 percent of total loans that remain modified in accordance with the CARES Act and Interagency Statement. As of March 31, 2021, the Corporation no longer offered the COVID-19 forbearance relief program; and as of June 30, 2021, the Corporation had no pending requests for payment relief. In accordance with the CARES Act and Interagency Statement, since these loans were current on their payments prior to the COVID-19 pandemic, these modifications are not considered troubled debt restructurings through the earlier of January 1, 2022, or 60 days after the national emergency terminates. Loan modifications in accordance with the CARES Act and Interagency Statement are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired. For additional information, see Note 3 of the Notes to Consolidated Financial Statements.

For customers that needed access to funds in their certificates of deposit to assist with living expenses during the COVID-19 pandemic, the Corporation waived early withdrawal penalties on a case by case basis. Overdraft and other fees were also waived on a case-by-case basis. These special fee waivers ended on March 31, 2021.

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

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

● Significantly lower market interest rates which may have a negative impact on variable rate loans indexed to LIBOR, SOFR, U.S. treasury and prime indices and on deposit pricing, as interest rate adjustments typically lag the effect on the yield earned on interest-earning assets because rates on many deposit accounts are decision-based, not tied to a specific market-based index, and are based on competition for deposits;

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

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

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

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

Off-Balance Sheet Financing Arrangements

Commitments and Derivative Financial Instruments. The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit, in the form of originating loans or providing funds under existing lines of credit.  These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the accompanying Consolidated Statements of Financial Condition.  The Corporation’s exposure to credit loss, in the event of non-performance by the counterparty to these financial instruments, is represented by the contractual amount of these instruments.  The Corporation uses the same credit policies in entering into financial instruments with off-balance sheet risk as it does for on-balance sheet instruments.  For a discussion on commitments and derivative financial instruments, see Note 15 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

Off-balance sheet arrangements.  The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit, in the form of originating loans or providing funds under existing lines of credit. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the accompanying Consolidated Statements of Financial Condition. The Bank's exposure to credit loss, in the event of non-performance by the counter party to these financial instruments, is represented by the contractual amount of these instruments.  The Bank uses the same credit policies in making commitments to extend credit as it does for on-balance sheet instruments.  As of June 30, 2021 and 2020, these commitments were $21.9 million and $13.6 million, respectively. For a discussion on financial instruments with off-balance sheet risks, see Note 15 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

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Comparison of Financial Condition at June 30, 2021 and 2020

Total assets increased $6.8 million, or 1%, to $1.18 billion at June 30, 2021 from June 30, 2020.  The increase was primarily attributable to an increase in investment securities, partly offset by decreases in loans held for investment and cash and cash equivalents.

Total cash and cash equivalents, primarily excess cash deposited with the Federal Reserve Bank of San Francisco, decreased $45.7 million, or 39%, to $70.3 million at June 30, 2021 from $116.0 million at June 30, 2020. The decrease was primarily attributable to the utilization of cash to fund purchases of investment securities and to pay off borrowings. The balance of cash and cash equivalents at June 30, 2021 was consistent with the Corporation’s strategy of adequately managing credit and liquidity risk.

Total investment securities (held to maturity and available for sale) increased $103.6 million, or 84%, to $226.9 million at June 30, 2021 from $123.3 million at June 30, 2020.  The increase was primarily the result of purchases of mortgage-backed securities held to maturity, partly offset by scheduled and accelerated principal payments on mortgage-backed securities. For additional information on investment securities, see Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

Loans held for investment decreased $51.8 million, or 6% to $851.0 million at June 30, 2021 from $902.8 million at June 30, 2020.  In fiscal 2021, the Corporation originated $215.0 million of loans held for investment, consisting primarily of single-family and multi-family loans, up 103% from $106.0 million, consisting primarily of single-family, multi-family and commercial real estate loans, for the same period last year.  In addition, the Corporation purchased $16.9 million of loans to be held for investment (primarily single-family and multi-family loans) in fiscal 2021, down 88% from $142.1 million of purchased loans to be held for investment (primarily single-family and multi-family loans) in fiscal 2020. Total loan principal payments in fiscal 2021 were $281.5 million, up 23% from $228.3 million in fiscal 2020.  There was no REO acquired in the settlement of loans in both fiscal 2021 and fiscal 2020.  The balance of multi-family, commercial real estate, construction and commercial business loans, net of undisbursed loan funds, decreased 4% to $583.6 million at June 30, 2021 from $605.4 million at June 30, 2020, and represented 68% and 67% of loans held for investment, respectively.  The balance of single-family loans held for investment decreased $30.5 million, or 10%, to $268.3 million at June 30, 2021, from $298.8 million at June 30, 2020. 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 $45.0 million, or 5%, to $938.0 million at June 30, 2021 from $893.0 million at June 30, 2020.  Transaction accounts increased $74.5 million, or 10%, to $797.5 million at June 30, 2021 from $723.0 million at June 30, 2020; while time deposits decreased $29.6 million, or 17%, to $140.4 million at June 30, 2021 from $170.0 million at June 30, 2020. As of June 30, 2021 and 2020, the percentage of transaction accounts to total deposits was 85% and 81%, respectively. Non-interest bearing deposits as a percentage of total deposits decreased slightly to 13.1% at June 30, 2021 from 13.3% at June 30, 2020. 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. For additional information on deposits, see Note 7 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

Borrowings, consisting of FHLB – San Francisco advances decreased $40.0 million, or 28%, to $101.0 million at June 30, 2021 from $141.0 million at June 30, 2020.  The decrease was due to scheduled maturities and prepayments of advances during fiscal 2021. The weighted-average maturity of the Corporation’s FHLB – San Francisco advances was approximately 24 months at June 30, 2021, down from 28 months at June 30, 2020. For additional information on borrowings, see Note 8 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

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

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Comparison of Operating Results for the Years Ended June 30, 2021 and 2020

General. The Corporation recorded net income of $7.6 million, or $1.00 per diluted share, for the fiscal year ended June 30, 2021, down $128,000, or 2%, from $7.7 million, or $1.01 per per diluted share, for the fiscal year ended June 30, 2020. The decrease in net income in fiscal 2021 was primarily attributable to a $5.8 million decrease in net interest income, partly offset by a $3.2 million decrease in non-interest expense and a $1.8 million improvement in the provision for loan losses resulting in a recovery of $708,000 from the allowance for loan losses in fiscal 2021. The Corporation's efficiency ratio, defined as non-interest expense divided by the sum of net interest income and non-interest income, increased slightly to 73% in fiscal 2021 from 71% in fiscal 2020. Return on average assets in fiscal 2021 decreased to 0.64% from 0.69% in fiscal 2020 and return on average stockholders' equity in fiscal 2021 decreased to 6.05% from 6.26% in fiscal 2020.

Net Interest Income. Net interest income decreased $5.8 million, or 16%, to $30.6 million in fiscal 2021 from $36.4 million in fiscal 2020. This decrease resulted from a decrease in the net interest margin, partly offset by an increase in the average balance of interest-earning assets. The net interest margin decreased 70 basis points to 2.66% in fiscal 2021 from 3.36% in fiscal 2020, due to an 86 basis point decrease in the average yield on interest-earning assets, partially offset by an 18 basis points decrease in the average cost of interest-bearing liabilities. The average balance of interest-earning assets increased $70.1 million, or 6%, to $1.15 billion in fiscal 2021 from $1.08 billion in fiscal 2020. The average balance of interest-bearing liabilities increased $67.9 million or 7% to $1.04 billion during fiscal 2021 as compared to $972.0 million during fiscal 2020.

Interest Income.  Total interest income decreased $7.3 million, or 17%, to $35.2 million for fiscal 2021 from $42.5 million for fiscal 2020. The decrease was primarily attributable to decreases in interest income on loans receivable and interest-earning deposits.

Interest income on loans receivable decreased $6.3 million, or 16%, to $32.8 million in fiscal 2021 from $39.1 million in fiscal 2020. This decrease was attributable to both a lower average loan yield and a lower average loan balance. The weighted average loan yield during fiscal 2021 decreased 48 basis points to 3.80% from 4.28% in fiscal 2020, due primarily to the decrease in market interest rates resulting from the decline in the general economic conditions impacted by the COVID-19 pandemic. The average balance of loans receivable decreased $51.9 million, or 6%, to $863.5 million during fiscal 2021 from $915.4 million during fiscal 2020.

Interest income from investment securities decreased $271,000, or 13%, to $1.8 million in fiscal 2021 from $2.1 million in fiscal 2020. This decrease was primarily a result of a decrease in the average yield, partly offset by an increase in the average balance.  The average yield on investment securities decreased 154 basis points to 0.90% during fiscal 2021 from 2.44% during fiscal 2020. The decrease in the average yield of investment securities was primarily attributable to purchases of new investment securities during fiscal 2021 with a lower average yield than the existing portfolio, repricings of adjustable rate mortgage-backed securities to a lower yield and a higher premium amortization resulting from higher principal payments. The average balance of investment securities increased $118.8 million, or 137%, to $205.6 million in fiscal 2021 from $86.8 million in fiscal 2020 as a result of the new purchases of investment securities, partly offset by scheduled and accelerated principal payments on mortgage-backed securities. During fiscal 2021, the Bank purchased $158.0 million of mortgage-backed securities with a weighted average yield of 0.82% and did not sell any investment securities.

During fiscal 2021, the Bank received $418,000 of cash dividends from its FHLB - San Francisco stock, a decrease of $116,000 or 22% from the $534,000 of cash dividends received in fiscal 2020.  The decrease in cash dividends was due primarily to a lower average yield on the FHLB-San Francisco stock held.

Interest income from interest-earning deposits, primarily cash deposited at the Federal Reserve Bank of San Francisco, decreased $579,000, or 88%, to $78,000 in fiscal 2021 from $657,000 in fiscal 2020, due to a lower average yield, partly offset by a higher average balance. The average yield decreased 80 basis points to 0.10% in fiscal 2021 from 0.90% in fiscal 2020, resulting from decreases in the targeted federal funds interest rate. The average balance of interest-earning deposits increased $3.2 million, or 4%, to $75.0 million in fiscal 2021 from $71.8 million in fiscal 2020.

Interest Expense.  Total interest expense for fiscal 2021 was $4.6 million as compared to $6.1 million for fiscal 2020, a decrease of $1.5 million, or 25%. This decrease was primarily attributable to a lower interest expense on deposits,

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particularly on time deposits and, to a lesser extent, a lower interest expense on borrowings. The average cost of interest-bearing liabilities was 0.44% during fiscal 2021, down 18 basis point from 0.62% during fiscal 2020.

Interest expense on deposits for fiscal 2021 was $1.7 million as compared to $2.9 million for fiscal 2020, a decrease of $1.2 million, or 41%.  The decrease in interest expense on deposits was primarily attributable to a lower average cost, particularly for time deposits. The average cost of deposits decreased 16 basis points to 0.19% in fiscal 2021 from 0.35% in fiscal 2020. The average cost of transaction accounts was 0.06% in fiscal 2021, down eight basis points from 0.14% in fiscal 2020; while the average cost of time deposits in fiscal 2021 was 0.82%, down 27 basis points, from 1.09% in fiscal 2020. The average balance of deposits increased $70.3 million, or 8%, to $914.4 million during fiscal 2021 from $844.1 million during fiscal 2020. The average balance of transaction accounts increased $102.2 million, or 16%, to $760.0 million in fiscal 2021 from $657.8 million in fiscal 2020. The average balance of time deposits decreased by $31.9 million, or 17%, to $154.4 million in fiscal 2021 from $186.3 million in fiscal 2020. The average balance of transaction accounts to total deposits in the fiscal 2021 was 83%, compared to 78% in fiscal 2020. 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 2021 decreased $295,000, or 9%, to $2.8 million as compared to $3.1 million in fiscal 2020. The decrease in interest expense on borrowings was due primarily to a lower average cost and, to a lesser extent, a lower average balance. The average cost of borrowings decreased to 2.24% in fiscal 2021 from 2.43% in fiscal 2020, a decrease of 19 basis points. The decrease in the average cost of borrowings was primarily due to scheduled maturies and prepayments of advances with a higher average cost in fiscal 2021, partly offset by prepayment fees. During fiscal 2021, the Bank prepaid a total of $25.0 million in advances with total prepayment fees of $33,000. The average balance of borrowings decreased $2.3 million, or 2%, to $125.6 million during fiscal 2021 from $127.9 million during fiscal 2020.

Provision (Recovery) for Loan Losses. During fiscal 2021, the Corporation recorded a recovery from the allowance for loan losses of $708,000, as compared to a $1.1 million provision for loan losses during fiscal 2020. The recovery from the allowance for loan losses in fiscal 2021 was primarily due to an improvement in the forecasted economic metrics utilized in the qualitative component adjustment to the allowance for loan losses attributable to an improved economic outlook during the second half of fiscal 2021, reducing the expected impact of the COVID-19 pandemic to the credit quality of the loan portfolio, and a  decrease in loans held for investment. The provision for loan losses in fiscal 2020 was primarily due to a qualitative component established in the allowance for loan losses methodology in response to the COVID-19 pandemic and forecasted adverse economic impact. The allowance for loan losses decreased $678,000, or 8%, to $7.6 million at June 30, 2021 from $8.3 million at June 30, 2020.

Non-performing assets (net of the collectively evaluated allowances and individually evaluated allowances), with underlying collateral primarily located in Southern California, increased $3.7 million or 76% to $8.6 million, or 0.73% of total assets, at June 30, 2021, compared to $4.9 million, or 0.42% of total assets, at June 30, 2020.  Non-performing loans at June 30, 2021 were $8.6 million, comprised of 27 single-family loans ($7.9 million) and one multi-family loan ($781,000).  There was no REO at both June 30, 2021 and 2020.  As of June 30, 2021, 89%, or $7.7 million of non-performing loans have a current payment status. Net loan recoveries in fiscal 2021 were $30,000 or 0.00% of average loans receivable, compared to net loan recoveries of $70,000 or 0.01% of average loans receivable in fiscal 2020.

Classified assets at June 30, 2021 were $10.4 million, comprised of $1.8 million in the special mention category, $8.6 million in the substandard category and no outstanding REO.  Classified assets at June 30, 2020 were $14.1 million, comprised of $8.6 million in the special mention category, $5.5 million in the substandard category and no outstanding REO. For additional information, see Item 1, “Business - “Delinquencies and Classified Assets” in this Form 10-K.

For the fiscal year ended June 30, 2021, there were 20 loans that were newly modified from their original terms (including 19 COVID-19 related forbearance loans downgraded when their monthly payment deferrals were extended beyond six months), re-underwritten or identified as a restructured loan; two loans were upgraded to the pass category; three loans were paid off; and no loans were converted to real estate owned. For the fiscal year ended June 30, 2020, there were two loans that were newly modified from their original terms, re-underwritten or identified as a restructured loan; one loan (previously modified) was downgraded; one loan was upgraded to the pass category; two loans were paid off; and no loans

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were converted to real estate owned. The outstanding balance of restructured loans at June 30, 2021 was $7.9 million (23 loans), up 204% from $2.6 million (eight loans) at June 30, 2020. As of June 30, 2021, all restructured loans were classified as substandard on non-accrual status, except three loans totaling $876,000. As of June 30, 2021, 97%, or $7.7 million of the restructured loans have a current payment status, consistent with their modified payment terms. During fiscal 2021, no restructured loans were in default within a 12-month period subsequent to their original restructuring.

The allowance for loan losses was $7.6 million at June 30, 2021, or 0.88% of gross loans held for investment, compared to $8.3 million, or 0.91% of gross loans held for investment at June 30, 2020.  The allowance for loan losses at June 30, 2021 includes $384,000 of individually evaluated allowances, compared to $100,000 of individually evaluated allowances at June 30, 2020. 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, 2021.  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.

Non-Interest Income. Total non-interest income increased $53,000, or 1%, to $4.6 million in fiscal 2021 from $4.5 million in fiscal 2020. The slight increase was primarily attributable to increases in loan servicing and other fees as well as in card and processing fees, partly offset by a decrease in deposit account fees.

Loan servicing and other fees increased $351,000, or 43%, to $1.2 million for fiscal 2021 from $819,000 in fiscal 2020. The increase was due primarily to higher loan prepayment fees, resuting from a higher loan payoffs, particularly in multi-family loans.  

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

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

Non-Interest Expense. Total non-interest expense in fiscal 2021 was $25.7 million, a decrease of $3.2 million, or 11%, as compared to $28.9 million in fiscal 2020. The decrease in non-interest expense was primarily attributable to a decrease in salaries and employee benefits expense, partly offset by an increase in deposit insurance premiums and regulatory assessments expense.

Salaries and employee benefits expense decreased $3.7 million, or 20%, to $15.2 million in fiscal 2021 from $18.9 million in fiscal 2020. The decrease in salaries and employee benefits was primarily due to a $2.4 million credit from the Employee Retention Tax Credit (“ERTC”), fewer number of employees, a decrease in incentive based compensation expense and a decrease in group insurance expenses, partly offset by an increase in stock-based compensation expense. 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.

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Deposit insurance premiums and regulatory assessments expense increased $325,000, or 143%, to $552,000 in fiscal 2021 from $227,000 in fiscal 2020.  The increase was due primarily to FDIC insurance premium credits applied in fiscal 2020, which were not replicated in fiscal 2021.

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. 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 $2.6 million for fiscal 2021, representing an effective tax rate of 25.8%, as compared to $3.2 million in fiscal 2020, representing an effective tax rate of 29.5%. The lower effective tax rate in fiscal 2021 was attributable to the tax benefits from the exercise of stock options and the non-taxable treatment of the ERTC for state tax purposes.

The 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. The Corporation determined that the above tax rates meet its estimated income tax obligations.  For additional information, see Note 9, "Income Taxes," of the Notes to Consolidated Financial Statements, contained in Item 8 of this Form 10-K.

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Average Balances, Interest and Average Yields/Costs

The following table sets forth certain information for the periods regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs thereof.   Yields and costs for the periods indicated are derived by dividing income or expense by the average monthly balance of assets or liabilities, respectively, for the periods presented.

	Year Ended June 30,
	2021								2020									2019
	Average					Yield/			Average						Yield/			Average						Yield/
(Dollars In Thousands)	Balance		Interest			Cost			Balance			Interest			Cost			Balance			Interest			Cost
Interest-earning assets:
Loans receivable, net(1)	$	863,507		$	32,856		3.80	%		$	915,353		$	39,145		4.28	%		$	926,003		$	40,092		4.33	%
Investment securities		205,628			1,849		0.90	%			86,761			2,120		2.44	%			97,870			2,042		2.09	%
FHLB – San Francisco stock		8,008			418		5.22	%			8,155			534		6.55	%			8,199			707		8.62	%
Interest-earning deposits		74,952			78		0.10	%			71,766			657		0.90	%			67,816			1,537		2.24	%
Total interest-earning assets		1,152,095			35,201		3.06	%			1,082,035			42,456		3.92	%			1,099,888			44,378		4.03	%
Non interest-earning assets		30,916									31,720									30,778
Total assets	$	1,183,011								$	1,113,755								$	1,130,666
Interest-bearing liabilities:
Checking and money market accounts(2)	$	470,129			268		0.06	%		$	396,399			424		0.11	%		$	381,790			428		0.11	%
Savings accounts		289,848			208		0.07	%			261,432			496		0.19	%			277,896			572		0.21	%
Time deposits		154,374			1,269		0.82	%			186,317			2,023		1.09	%			220,432			2,381		1.08	%
Total deposits		914,351			1,745		0.19	%			844,148			2,943		0.35	%			880,118			3,381		0.38	%
Borrowings		125,589			2,817		2.24	%			127,882			3,112		2.43	%			109,558			2,827		2.58	%
Total interest-bearing liabilities		1,039,940			4,562		0.44	%			972,030			6,055		0.62	%			989,676			6,208		0.63	%
Non interest-bearing liabilities		18,158									18,968									19,288
Total liabilities		1,058,098									990,998									1,008,964
Stockholders’ equity		124,913									122,757									121,702
Total liabilities and stockholders’ equity	$	1,183,011								$	1,113,755								$	1,130,666
Net interest income				$	30,639								$	36,401								$	38,170
Interest rate spread(3)							2.62	%								3.30	%								3.40	%
Net interest margin(4)							2.66	%								3.36	%								3.47	%
Ratio of average interest- earning assets to average interest-bearing liabilities							110.78	%								111.32	%								111.14	%

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

(2)Includes the average balance of non interest-bearing checking accounts of $116.1 million, $90.0 million and $84.1 million in the years ended June 30, 2021, 2020 and 2019, respectively.

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

(4)Represents net interest income as a percentage of average interest-earning assets.

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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.

	Year Ended June 30, 2021 Compared
	To Year Ended June 30, 2020
	Increase (Decrease) Due to
(In Thousands)	Rate		Volume		Rate/Volume		Net
Interest-earning assets:
Loans receivable(1)	$	(4,319)	$	(2,219)	$	249	$	(6,289)
Investment securities		(1,340)		2,900		(1,831)		(271)
FHLB – San Francisco stock		(108)		(10)		2		(116)
Interest-bearing deposits		(583)		29		(25)		(579)
Total net change in income on interest-earning assets		(6,350)		700		(1,605)		(7,255)
Interest-bearing liabilities:
Checking and money market accounts		(200)		81		(37)		(156)
Savings accounts		(308)		54		(34)		(288)
Time deposits		(492)		(348)		86		(754)
Borrowings		(243)		(56)		4		(295)
Total net change in expense on interest-bearing liabilities		(1,243)		(269)		19		(1,493)
Net (decrease) increase in net interest income	$	(5,107)	$	969	$	(1,624)	$	(5,762)

(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, 2020 Compared
	To Year Ended June 30, 2019
	Increase (Decrease) Due to
(In Thousands)	Rate		Volume		Rate/ Volume		Net
Interest-earning assets:
Loans receivable(1)	$	(491)	$	(461)	$	5	$	(947)
Investment securities		349		(232)		(39)		78
FHLB – San Francisco stock		(170)		(4)		1		(173)
Interest-earning deposits		(915)		88		(53)		(880)
Total net change in income on interest-earning assets		(1,227)		(609)		(86)		(1,922)
Interest-bearing liabilities:
Checking and money market accounts		—		8		(12)		(4)
Savings accounts		(44)		(35)		3		(76)
Time deposits		14		(369)		(3)		(358)
Borrowings		(161)		474		(28)		285
Total net change in expense on interest-bearing liabilities		(191)		78		(40)		(153)
Net (decrease) increase in net interest income	$	(1,036)	$	(687)	$	(46)	$	(1,769)

(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.

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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. 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.

The primary investing activity of the Bank has been the origination and purchase of loans held for investment. During the fiscal years ended June 30, 2021 and 2020, the Bank originated loans held for investment of $215.0 million and $106.0 million, respectively. In addition, the Bank purchased loans held for investment from other financial institutions in fiscal 2021 and 2020 of $16.9 million and $142.1 million, respectively. At June 30, 2021 and 2020, the Bank had loan origination commitments totaling $21.9 million and $13.6 million, respectively, with undisbursed loan funds of $4.5 million and $4.0 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, 2021 and 2020, the net increase in deposits was $45.0 million and $51.7 million, respectively.  On June 30, 2021, time deposits that are scheduled to mature in one year or less were $76.7 million. Historically, the Bank has been able to retain a significant percentage of its time deposits as they mature by adjusting deposit rates to the current interest rate environment.

The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities. The Bank generally maintains sufficient cash and cash equivalents to meet short-term liquidity needs.  At June 30, 2021, total cash and cash equivalents were $70.3 million, or 5.9% of total assets. 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, 2021, the remaining financing availability at FHLB - San Francisco was $296.8 million and the remaining available collateral was $343.1 million. In addition, the Bank has secured a $206.1 million discount window facility at the Federal Reserve Bank of San Francisco, collateralized by investment securities with a fair market value of $219.2 million. The Bank also has a federal funds facility with its correspondent bank for $17.0 million which matures on June 30, 2022. As of June 30, 2021, there were no outstanding borrowings under the discount window facility or the federal funds facility with its correspondent bank.

Regulations require the Bank to maintain adequate liquidity to assure safe and sound operations. The Bank's average liquidity ratio (defined as the ratio of average qualifying liquid assets to average deposits and borrowings) for the quarter ended June 30, 2021 increased to 32.0% from 23.1% during the same quarter ended June 30, 2020. The increase in the liquidity ratio was due primarily to the increase in average qualifying liquid assets, partly offset by the smaller increase in average deposits and borrowings during the quarter ended June 30, 2021 in comparison to the quarter ended June 30, 2020. The Bank augments its liquidity by maintaining sufficient borrowing capacity at the FHLB - San Francisco, Federal Reserve Bank of San Francisco and its correspondent bank.

The Bank, as a federally-chartered, federally insured savings bank, is subject to the capital requirements established by the OCC. Under the OCC's 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 weighting and other factors. 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.

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

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

Impact of Inflation and Changing Prices

The Corporation's consolidated financial statements are prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time as a result of inflation.  The impact of inflation is reflected in the increasing cost of the Corporation's operations.  Unlike most industrial companies, nearly all assets and liabilities of the Corporation are monetary.  As a result, interest rates have a greater impact on the Corporation's performance than do the effects of general levels of inflation.  In addition, interest rates do not necessarily move in the direction, or to the same extent, as the prices of goods and services.

Impact of New Accounting Pronouncements

Various elements of the Corporation's accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments.  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" and in the section entitled “Organization and Summary of Significant Accounting Policies” contained in Note 1 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.  Management believes that the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate based on the factual circumstances at the time.  However, because of the sensitivity of the financial statements to these accounting policies, changes to the judgments, estimates and assumptions used could result in material differences in the results of operations or financial condition.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Quantitative Aspects of Market Risk. The Corporation does not maintain a trading account for any class of financial instrument nor does it purchase high-risk derivative financial instruments.  Furthermore, the Corporation is not subject to foreign currency exchange rate risk or commodity price risk.  The primary market risk that the Corporation faces is interest rate risk.  For information regarding the sensitivity to interest rate risk of the Corporation's interest-earning assets and interest-bearing liabilities, see “Interest Rate Risk” below and Item 1, “Business - Lending Activities - Maturity of Loans Held for Investment,” “- Investment Securities Activities,” and “- Deposit Activities and Other Sources of Funds - Time Deposits by Maturities”  in this Form 10-K.

Interest Rate Risk.  One of the Corporation's principal financial objectives is to achieve long-term profitability while reducing its exposure to fluctuating interest rates.  The Corporation, through the Corporation's Asset-Liability Committee, has sought to reduce the exposure of its earnings to changes in interest rates by attempting to manage the repricing mismatch between interest-earning assets and interest-bearing liabilities.  The principal element in achieving this objective is to increase the interest-rate sensitivity of the Corporation's interest-earning assets by retaining for its portfolio new loan originations with interest rates subject to periodic adjustment to market conditions. In addition, the Corporation maintains an investment portfolio, which is largely comprised of U.S. government agency MBS and U.S. government sponsored enterprise MBS with contractual maturities of up to 30 years that reprice frequently or have a relatively short-average life. The Corporation relies on retail deposits as its primary source of funds while utilizing FHLB - San Francisco advances as a secondary source of funding.  Management believes retail deposits, unlike brokered deposits, reduce the effects of interest rate fluctuations because they generally represent a more stable source of funds.  As part of its interest rate risk management strategy, the Corporation promotes transaction accounts and time deposits with terms up to seven years.  For additional information, see Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K.

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Through the use of an internal interest rate risk model, the Corporation is able to analyze its interest rate risk exposure by measuring the change in net portfolio value (“NPV”) over a variety of interest rate scenarios.  NPV is defined as the net present value of expected future cash flows from assets, liabilities and off-balance sheet contracts.  The calculation is intended to illustrate the change in NPV that would occur in the event of an immediate change in interest rates of -100, +100, +200 and +300 basis points (“bp”) with no effect given to steps that management might take to counter the effect of the interest rate movement. As of June 30, 2021, the targeted federal funds rate range was 0.00% to 0.25%, making an immediate change of minus 200 basis points or more unlikely.

The following table sets forth as of June 30, 2021 the estimated changes in NPV based on the indicated interest rate environment (dollars in thousands):

	Net				Portfolio		NPV as Percentage
Basis Points ("bp")	Portfolio		NPV		Value of		of Portfolio Value		Sensitivity
Change in Rates	Value		Change(1)		Assets		Assets(2)		Measure(3)
+300 bp	$	255,758	$	102,842	$	1,311,707	19.50	%	+696	bp
+200 bp	$	228,146	$	75,230	$	1,287,637	17.72	%	+518	bp
+100 bp	$	195,450	$	42,534	$	1,258,572	15.53	%	+299	bp
-	$	152,916	$	—	$	1,219,763	12.54	%	—
-100 bp	$	135,225	$	(17,691)	$	1,201,508	11.25	%	(129)	bp

(1)Represents the increase (decrease) of the NPV at the indicated interest rate change in comparison to the NPV at June 30, 2021 (“base case”).

(2)Calculated as the NPV divided by the portfolio value of total assets.

(3)Calculated as the change in the NPV ratio (NPV as a Percentage of Portfolio Value Assets) from the base case amount assuming the indicated change in interest rates (expressed in basis points).

The following table is derived from the internal interest rate risk model and represents the change in the NPV at a -100 basis point rate shock at June 30, 2021 and 2020:

	At June 30, 2021		At June 30, 2020
	(-100 bp rate shock)		(-100 bp rate shock)
Pre-Shock NPV Ratio: NPV as a % of PV Assets	12.54	%	11.93	%
Post-Shock NPV Ratio: NPV as a % of PV Assets	11.25	%	10.57	%
Sensitivity Measure: Change in NPV Ratio	-129	bp	-136	bp

The pre-shock NPV ratio increased 61 basis points to 12.54 percent at June 30, 2021 from 11.93 percent at June 30, 2020 and the post-shock NPV ratio increased 68 basis points to 11.25 percent at June 30, 2021 from 10.57 percent at June 30, 2020.  The increase of the NPV ratios was primarily attributable to the net income in fiscal 2021, amortization of stock-based compensation expense and exercise of stock options, partly offset by a $5.0 million cash dividend distribution from the Bank to the Corporation in September 2020 and stock repurchases.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing tables.  For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates.  Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates.  Additionally, certain assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset.  Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from time deposits could likely deviate significantly from those assumed when calculating the results described in the tables above.  It is also possible that, as a result of an interest rate increase, the higher mortgage payments required from ARM borrowers could result in an increase in delinquencies and defaults. Accordingly, the data presented in the tables in this section should not be relied upon as indicative of actual results in the event of changes in interest rates.  Furthermore, the NPV presented in the foregoing tables is not intended to present the fair market value of the Corporation, nor does it represent amounts that would be available for distribution to shareholders in the event of the liquidation of the Corporation.

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The Corporation measures and evaluates the potential effects of interest rate movements through an interest rate sensitivity "gap" analysis.  Interest rate sensitivity reflects the potential effect on net interest income when there is movement in interest rates. For loans, securities and liabilities with contractual maturities, the table presents contractual repricing or scheduled maturity.  For transaction accounts (checking, money market and savings deposits) that have no contractual maturity, the table presents estimated principal cash flows and, as applicable, the Corporation's historical experience, management's judgment and statistical analysis concerning their most likely withdrawal behaviors.

The following table represents the interest rate gap analysis of the Corporation's assets and liabilities as of June 30, 2021:

	Term to Contractual Repricing, Estimated Repricing, or Contractual
	Maturity(1)
	As of June 30, 2021
				Greater than			Greater than			Greater than
	12 months or			1 year to 3			3 years to			5 years or
(Dollars In Thousands)	less			years			5 years			non-sensitive			Total
Repricing Assets:
Cash and cash equivalents	$	64,989		$	—		$	—		$	5,281		$	70,270
Investment securities		16,656			—			—			210,237			226,893
Loans held for investment		266,691			202,083			229,151			153,035			850,960
FHLB - San Francisco stock		8,155			—			—			—			8,155
Other assets		2,999			—			—			24,319			27,318
Total assets		359,490			202,083			229,151			392,872			1,183,596
Repricing Liabilities and Equity:
Checking deposits - non interest-bearing		—			—			—			123,179			123,179
Checking deposits - interest bearing		49,108			98,216			98,216			81,848			327,388
Savings deposits		61,460			122,920			122,919			—			307,299
Money market deposits		19,835			19,835			—			—			39,670
Time deposits		76,705			48,917			14,416			399			140,437
Borrowings		20,983			60,000			20,000			—			100,983
Other liabilities		247			—			—			17,113			17,360
Stockholders' equity		—			—			—			127,280			127,280
Total liabilities and stockholders' equity		228,338			349,888			255,551			349,819			1,183,596
Repricing gap positive (negative)	$	131,152		$	(147,805)		$	(26,400)		$	43,053		$	—
Cumulative repricing gap:
Dollar amount	$	131,152		$	(16,653)		$	(43,053)		$	—		$	—
Percent of total assets		11	%		(1)	%		(4)	%		—	%		—	%

(1) Cash and cash equivalents are presented as estimated repricing; investment securities and loans held for investment are presented as contractual maturities or contractual repricing (without consideration for prepayments); FHLB - San Francisco stock is presented as contractual repricing; transaction accounts (checking, savings and money market deposits) are presented as estimated repricing; while time deposits (without consideration for early withdrawals) and borrowings are presented as contractual maturities.

The static gap analysis under 12 months or less duration shows a positive position in the "Cumulative repricing gap - dollar amount" category, indicating more assets are sensitive to repricing than liabilities in the short term. Management views non interest-bearing deposits to be the least sensitive to changes in market interest rates and these accounts are therefore characterized as long-term funding. Interest-bearing checking deposits are considered more sensitive, followed by increased sensitivity for savings and money market deposits. For the purpose of calculating gap, a portion of these interest-

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bearing deposit balances are assumed to be subject to estimated repricing as follows: interest-bearing checking deposits at 15% per year, savings deposits at 20% per year and money market deposits at 50% in the first and second years.

The gap results presented above could vary substantially if different assumptions are used or if actual experience differs from the assumptions used in the preparation of the gap analysis.  Furthermore, the gap analysis provides a static view of interest rate risk exposure at a specific point in time without taking into account redirection of cash flows activity and deposit fluctuations.

The extent to which the net interest margin will be impacted by changes in prevailing interest rates will depend on a number of factors, including how quickly interest-earning assets and interest-bearing liabilities react to interest rate changes. It is not uncommon for rates on certain assets or liabilities to lag behind changes in the market rates of interest.  Additionally, prepayments of loans and early withdrawals of certificates of deposit could cause interest sensitivities to vary.  As a result, the relationship between interest-earning assets and interest-bearing liabilities, as shown in the previous table, is only a general indicator of interest rate sensitivity and the effect of changing interest rates on net interest income is likely to be different from that predicted solely on the basis of the interest rate sensitivity analysis set forth in the previous table.

The Corporation also models the sensitivity of net interest income for the 12-month period subsequent to any given month-end assuming a dynamic balance sheet accounting for, among other items:

● The Corporation’s current balance sheet and repricing characteristics;

● Forecasted balance sheet growth consistent with the business plan;

● Current interest rates and yield curves and management estimates of projected interest rates;

● Embedded options, interest rate floors, periodic caps and lifetime caps;

● Repricing characteristics for market rate sensitive instruments;

● Loan, investment, deposit and borrowing cash flows;

● Loan prepayment estimates for each type of loan; and

● Immediate, permanent and parallel movements in interest rates of plus 300, 200 and 100 and minus 100 basis points.

The following table describes the results of the analysis at June 30, 2021 and 2020:

At June 30, 2021		At June 30, 2020
Basis Point (bp)	Change in	Basis Point (bp)	Change in
Change in Rates	Net Interest Income	Change in Rates	Net Interest Income
+300 bp	4.55%	+300 bp	15.11%
+200 bp	2.06%	+200 bp	9.95%
+100 bp	0.23%	+100 bp	5.25%
-100 bp	0.22%	-100 bp	-0.05%

At June 30, 2021 and 2020, the Corporation was asset sensitive as its interest-earning assets at those dates are expected to reprice more quickly than its interest-bearing liabilities during the subsequent 12-month period.  Therefore, in a rising interest rate environment, the model projects an increase in net interest income over the subsequent 12-month period. In a falling interest rate environment, the results project a decrease in net interest income over the subsequent 12-month period, except for minus 100 basis-point scenario at June 30, 2021.

Management believes that the assumptions used to complete the analysis described in the table above are reasonable.  However, past experience has shown that immediate, permanent and parallel movements in interest rates will not necessarily occur.  Additionally, while the analysis provides a tool to evaluate the projected net interest income to changes in interest rates, actual results may be substantially different if actual experience differs from the assumptions used to complete the analysis, particularly with respect to the 12-month business plan when asset growth is forecast.  Therefore, the model results that the Corporation discloses should be thought of as a risk management tool to compare the trends of the Corporation’s current disclosure to previous disclosures, over time, within the context of the actual performance of the treasury yield curve.

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Item 8.  Financial Statements and Supplementary Data

Please refer to the Consolidated Financial Statements and Notes to Consolidated Financial Statements in this Form 10-K and incorporated into this Item 8 by reference.

Item 9.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

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, 2021 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, 2021, 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, 2021, 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, 2021.  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, 2021.

Date: September 3, 2021
	/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.

PART III

Item 10.  Directors, Executive Officers and Corporate Governance

The information required by this item regarding the Corporation’s Board of Directors is incorporated herein by reference from the section captioned “Proposal I – Election of Directors” in the Corporation’s Proxy Statement, a copy of which will be filed with the Securities and Exchange Commission no later than 120 days after the Corporation’s fiscal year end.

The executive officers of the Corporation and the Bank are elected annually and hold office until their respective successors have been elected and qualified or until death, resignation or removal by the Board of Directors.  For information regarding the Corporation’s executive officers, see Item 1, “Business - Executive Officers” in this Form 10-K.

Code of Ethics for Senior Financial Officers

The Corporation has adopted a Code of Ethics, which applies to all directors, officers, and employees of the Corporation.  The Code of Ethics is publicly available as Exhibit 14 to the Corporation’s Annual Report on Form 10-K for the fiscal year June 30, 2007, and is available on the Corporation’s website, www.myprovident.com.  If the Corporation makes any substantial amendments to the Code of Ethics or grants any waiver, including any implicit waiver, from a provision of the Code to the Corporation’s Chief Executive Officer, Chief Financial Officer or Controller, the Corporation will disclose the nature of such amendment or waiver on the Corporation’s website and in a report on Form 8-K.

Audit Committee and Audit Committee Financial Expert

The Corporation has a separately-designated standing audit committee established in accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended.  The audit committee consists of three independent directors of the Corporation: Joseph P. Barr, Judy A. Carpenter and Debbi H. Guthrie.  The Corporation has designated Joseph P. Barr, Audit Committee Chairman, as its audit committee financial expert.  Mr. Barr is independent, as independence for audit committee members is defined under the listing standards of the NASDAQ Stock Market, a Certified Public Accountant in California and Ohio and has been practicing public accounting for over 40 years.

Nominating Procedures

There have been no material changes to the procedures by which shareholders may recommend nominees to its Board of Directors since last disclosed to shareholders.

Item 11.  Executive Compensation

The information required by this item is incorporated herein by reference from the sections captioned “Executive Compensation” and “Directors’ Compensation” in the Proxy Statement, a copy of which will be filed with the Securities and Exchange Commission no later than 120 days after the Corporation’s fiscal year end.

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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, 2021:

					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	209,000	$	16.70		57,500
Restricted Stock	97,875		N/A		62,750
Equity compensation plans not approved by security holders	N/A		N/A		N/A
Total	518,250	$	16.22	(1)​	120,250

(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, 2020)
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	2021 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, 2021, 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, 2021, formatted in Inline XBRL and contained in Exhibit 101

74

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 3, 2021	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 3, 2021
Craig G. Blunden	Chief Executive Officer (Principal Executive Officer)
/s/ Donavon P. Ternes	President, Chief Operating Officer	September 3, 2021
Donavon P. Ternes	and Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ Joseph P. Barr	Director	September 3, 2021
Joseph P. Barr
/s/ Bruce W. Bennett	Director	September 3, 2021
Bruce W. Bennett
/s/ Judy A. Carpenter	Director	September 3, 2021
Judy A. Carpenter
/s/ Debbi H. Guthrie	Director	September 3, 2021
Debbi H. Guthrie
/s/ Roy H. Taylor	Director	September 3, 2021
Roy H. Taylor
/s/ William E. Thomas	Director	September 3, 2021
William E. Thomas

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Provident Financial Holdings, Inc.

Consolidated Financial Statements

Index

	Page
Report of Independent Registered Public Accounting Firm	77
Consolidated Statements of Financial Condition as of June 30, 2021 and 2020	79
Consolidated Statements of Operations for the years ended June 30, 2021 and 2020	80
Consolidated Statements of Comprehensive Income for the years ended June 30, 2021 and 2020	81
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2021 and 2020	82
Consolidated Statements of Cash Flows for the years ended June 30, 2021 and 2020	83
Notes to Consolidated Financial Statements	84

76

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of

Provident Financial Holdings, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of financial condition of Provident Financial Holdings, Inc. and subsidiary (the “Corporation”) as of June 30, 2021 and 2020, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows, for each of the two years in the period ended June 30, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Corporation as of June 30, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2021, in conformity with accounting principles generally accepted in the United States of America.

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 is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

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 $7.6 million at June 30, 2021. 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.  

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

77

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

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

/s/Deloitte & Touche LLP

Costa Mesa, California
September 3, 2021

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)	2021		2020
Assets
Cash and cash equivalents	$	70,270	$	116,034
Investment securities - held to maturity, at cost		223,306		118,627
Investment securities - available for sale, at fair value		3,587		4,717
Loans held for investment, net of allowance for loan losses of $7,587 and $8,265, respectively; includes $1,874 and $2,258 of loans held at fair value, respectively		850,960		902,796
Accrued interest receivable		2,999		3,271
Federal Home Loan Bank (“FHLB”) - San Francisco stock		8,155		7,970
Premises and equipment, net		9,377		10,254
Prepaid expenses and other assets		14,942		13,168
Total assets	$	1,183,596	$	1,176,837
Liabilities and Stockholders’ Equity
Liabilities:
Non interest-bearing deposits	$	123,179	$	118,771
Interest-bearing deposits		814,794		774,198
Total deposits		937,973		892,969
Borrowings		100,983		141,047
Accounts payable, accrued interest and other liabilities		17,360		18,845
Total liabilities		1,056,316		1,052,861
Commitments and Contingencies (Note 14)
Stockholders’ equity:
Preferred stock, $0.01 par value (2,000,000 shares authorized; NaN issued and outstanding)		0		0
Common stock, $0.01 par value; (40,000,000 shares authorized; 18,229,615 and 18,097,615 shares issued; 7,541,469 and 7,436,315 shares outstanding, respectively)		183		181
Additional paid-in capital		97,978		95,593
Retained earnings		197,733		194,345
Treasury stock at cost (10,688,146 and 10,661,300 shares, respectively)		(168,686)		(166,247)
Accumulated other comprehensive income, net of tax		72		104
Total stockholders’ equity		127,280		123,976
Total liabilities and stockholders’ equity	$	1,183,596	$	1,176,837

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)	2021		2020
Interest income:
Loans receivable, net	$	32,856	$	39,145
Investment securities		1,849		2,120
FHLB - San Francisco stock		418		534
Interest-earning deposits		78		657
Total interest income		35,201		42,456
Interest expense:
Deposits		1,745		2,943
Borrowings		2,817		3,112
Total interest expense		4,562		6,055
Net interest income		30,639		36,401
(Recovery) provision for loan losses		(708)		1,119
Net interest income, after (recovery) provision for loan losses		31,347		35,282
Non-interest income:
Loan servicing and other fees		1,170		819
Deposit account fees		1,247		1,610
Card and processing fees		1,605		1,454
Other		551		637
Total non-interest income		4,573		4,520
Non-interest expense:
Salaries and employee benefits(1)		15,157		18,913
Premises and occupancy		3,500		3,465
Equipment expense		1,153		1,129
Professional expense		1,561		1,439
Sales and marketing expense		680		773
Deposit insurance premium and regulatory assessments		552		227
Other		3,130		2,954
Total non-interest expense		25,733		28,900
Income before income taxes		10,187		10,902
Provision for income taxes		2,626		3,213
Net income	$	7,561	$	7,689
Basic earnings per share	$	1.01	$	1.03
Diluted earnings per share	$	1.00	$	1.01
Cash dividends per share	$	0.56	$	0.56

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

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

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PROVIDENT FINANCIAL HOLDINGS, INC.

Consolidated Statements of Comprehensive Income

	Year Ended June 30,
(In Thousands)	2021		2020
Net income	$	7,561	$	7,689
Change in unrealized holding losses on securities available for sale and interest-only strips		(45)		(81)
Reclassification of losses to net income		0		—
Other comprehensive loss, before income tax benefit		(45)		(81)
Income tax benefit		(13)		(24)
Other comprehensive loss		(32)		(57)
Total comprehensive income	$	7,529	$	7,632

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									Compre-hensive
	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, 2019	7,486,106	$	181	$	94,351	$	190,839	$	(164,891)	$	161	$	120,641
Net income							7,689						7,689
Other comprehensive loss											(57)		(57)
Purchase of treasury stock	(66,041)								(1,283)				(1,283)
Forfeiture of restricted stock					73				(73)				—
Amortization of restricted stock					873								873
Exercise of stock options	16,250				215								215
Stock options expense					81								81
Cash dividends(2)							(4,183)						(4,183)
Balance at June 30, 2020	7,436,315	$	181	$	95,593	$	194,345	$	(166,247)	$	104	$	123,976
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

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

(2) Cash dividends of $0.56 per share were paid in both fiscal 2021 and 2020.

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)	2021		2020
Cash flows from operating activities:
Net income	$	7,561	$	7,689
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		6,266		3,391
(Recovery) provision from loan losses		(708)		1,119
Stock-based compensation		1,303		954
Provision for deferred income taxes		481		552
Decrease in accounts payable, accrued interest and other liabilities		(658)		(2,954)
Increase in prepaid expenses and other assets		(2,672)		(2,797)
Net cash provided by operating activities		11,573		7,954
Cash flows from investing activities:
Decrease (increase) in loans held for investment, net		50,088		(25,108)
Purchase of investment securities - held to maturity		(158,984)		(56,262)
Maturity of investment securities - held to maturity		800		400
Principal payments from investment securities - held to maturity		51,544		30,890
Principal payments from investment securities - available for sale		1,090		1,173
Purchase of FHLB - San Francisco stock		(185)		—
Proceeds from redemption of FHLB – San Francisco stock		—		229
Purchase of premises and equipment		(225)		(229)
Net cash used for investing activities		(55,872)		(48,907)
Cash flows from financing activities:
Increase in deposits, net		45,004		51,698
Proceeds from long-term borrowings		—		30,007
Repayments of long-term borrowings		(35,064)		(67)
(Repayment of) proceeds from short-term borrowings, net		(5,000)		10,000
Treasury stock purchases		(2,336)		(1,283)
Proceeds from exercise of stock options		981		215
Withholding taxes on stock-based compensation		(877)		(32)
Cash dividends		(4,173)		(4,183)
Net cash (used for) provided by financing activities		(1,465)		86,355
Net (decrease) increase in cash and cash equivalents		(45,764)		45,402
Cash and cash equivalents at beginning of year		116,034		70,632
Cash and cash equivalents at end of year	$	70,270	$	116,034
Supplemental information:
Cash paid for interest	$	4,660	$	6,056
Cash paid for income taxes	$	3,320	$	775
Transfer of loans held for sale to held for investment	$	—	$	1,085

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 1 business segment through the Bank. The Bank's activities include attracting deposits, offering banking services and originating and purchasing single-family, multi-family, commercial real estate, construction and, to a lesser extent, other mortgage, commercial business and consumer loans for investment. 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.  Additionally, multi-family and commercial real estate loans secured by commercial property, land and other residential properties have become a substantial part of loans held for investment and comprised 68% and 66% of total loans held for investment at June 30, 2021 and 2020, respectively. These loans are generally offered to customers and businesses located in California.

Net loan origination fees and certain direct origination expenses are deferred and amortized to interest income over the contractual life of the loan using the effective interest method.  Amortization is discontinued for non-performing loans.  Interest receivable represents, for the most part, the current month’s interest, which will be included as a part of the borrower’s next monthly loan payment.  Interest receivable is accrued only if deemed collectible.  Loans are placed on non-performing status when they become 90 days past due or if the loan is deemed impaired.  When a loan is placed on non-performing status, interest accrued but not received is reversed against interest income.  Interest income on non-performing loans is subsequently recognized only to the extent that cash is received and the principal balance is deemed collectible.  If the principal balance is not deemed collectible, the entire payment received (principal and interest) is applied to the outstanding loan balance.  Non-performing loans that become current as to both principal and interest are returned to accrual status after demonstrating satisfactory payment history (usually six consecutive months) and when future payments are expected to be collected.

Allowance for loan losses

The allowance for loan losses involves significant judgment and assumptions by management, which has a material impact on the carrying value of net loans. Management considers the accounting estimate related to the allowance for loan losses a critical accounting estimate because it is highly susceptible to changes from period to period, requiring management to make assumptions about probable incurred losses inherent in the loan portfolio at the balance sheet date. The impact of a sudden large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings.

The allowance is based on two principles of accounting:  (i) ASC 450, “Contingencies,” which requires that losses be accrued when they are probable of occurring and can be estimated; and (ii) ASC 310, “Receivables,” which requires that losses be accrued for non-performing loans that may be determined on an individually evaluated basis or based on an aggregated pooling method.

The allowance has two components: collectively evaluated allowances and individually evaluated allowances.  Each of these components is based upon estimates that can change over time.  The allowance is based on historical experience and, as a result, can differ from actual losses incurred in the future.  Additionally, differences may result from qualitative factors such as unemployment data, gross domestic product, interest rates, retail sales, the value of real estate and real estate market conditions.  The historical data is reviewed at least quarterly and adjustments are made as needed.  Management considers, based on currently available information, the allowance for loan losses sufficient to absorb probable losses inherent in loans held for investment. Various techniques are used to arrive at an individually evaluated allowance, including discounted cash 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

85

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

Currency (“OCC “) and Consumer Financial Protection Bureau issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus ("Interagency Statement"). Among other things, the CARES Act and Interagency Statement provided relief to borrowers, including the opportunity to defer loan payments while not negatively affecting their credit standing. For commercial and consumer customers, the Corporation has provided relief options, including payment deferrals and fee waivers.

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

After the payment deferral period (forbearance period), normal loan payments will once again become due and payable. 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, 2021, the Corporation had no pending requests for this type of payment relief. As of June 30, 2021, the Corporation had 4 forbearance loans with a total outstanding balance of $1.8 million or 0.22 percent of total loans that were modified and operating under forbearance agreements in accordance with the CARES Act and Interagency Statement. 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 upgrades restructured single-family loans to the pass category if the borrower has demonstrated satisfactory contractual payments for at least six consecutive months or 12 consecutive months for those loans that were restructured more than once. Once the borrower has demonstrated satisfactory contractual payments beyond 12 consecutive months, the loan is no longer categorized as a restructured loan. In addition to the payment history described above; multi-family, commercial real estate, construction and commercial business loans must also demonstrate a combination of corroborating characteristics to be upgraded, such as: satisfactory cash flow, satisfactory guarantor support, and additional collateral support, among others.

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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, 2021 and 2020, the estimated deferred tax asset, which is included in prepaid expenses and other assets, was $2.5 million and $3.0 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 compensation. The Corporation did not have any liabilities for uncertain tax positions or any known unrecognized tax benefit at June 30, 2021 or 2020.

Bank owned life insurance ("BOLI")

ASC 715-60-35, "Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements," requires an employer to recognize obligations associated with endorsement split-dollar life insurance arrangements that extend into the participant’s post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. The Corporation adopted ASC 715-60-35 using the latter option, i.e., based on the future death benefit. The Bank purchases BOLI policies on the lives of certain executive officers while they are employed by the Bank and is the owner and beneficiary of the policies. The Bank invests in BOLI to provide an efficient form of funding for long-term retirement and other employee benefits costs. The Bank records these BOLI policies within prepaid expenses and other assets in the Consolidated Statements of Financial Condition at each policy’s respective cash surrender value, with net changes recorded in other non-interest income in the Consolidated Statements of Operations.

Cash dividend

A declaration or payment of dividends is at the discretion of the Corporation’s Board of Directors, who take into account the Corporation’s financial condition, results of operations, tax considerations, capital requirements, industry standards, economic conditions and other factors, including the regulatory restrictions which affect the payment of dividends by the Bank to the Corporation.  Under Delaware law, dividends may be paid either out of surplus or, if there is no surplus, out of net profits for the current fiscal year and/or the preceding fiscal year in which the dividend is declared. For additional information, see Note 20 of the Notes to Consolidated Financial Statements regarding the subsequent event related to the cash dividend.

Stock repurchases

The Corporation repurchases its common stock consistent with Board-approved stock repurchase plans. During fiscal 2021, a total of 104,982 shares of common stock were purchased at an average cost of $16.67 per share. As of June 30, 2021, a total of 266,833 shares remain available for future repurchase pursuant to the Corporation's April 2020 stock repurchase plan.

Earnings per common share (“EPS”)

Basic EPS represents net income divided by the weighted average common shares outstanding during the period excluding any potential dilutive effects. Diluted EPS gives effect to any potential issuance of common stock that would have caused basic EPS to be lower as if the issuance had already occurred. Accordingly, diluted EPS reflects an increase in the weighted average shares outstanding as a result of the assumed exercise of stock options and the vesting of restricted stock. The computation of diluted EPS does not assume exercise of stock options and vesting of restricted stock that would have an anti-dilutive effect on EPS.

Stock-based compensation

ASC 718, “Compensation – Stock Compensation,” requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and directors. Stock-based compensation expense, inclusive of restricted stock expense, recognized in the consolidated statements of operations for the years ended June 30, 2021 and 2020 was $1.3 million and $954,000, respectively.

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 $1.2 million and $873,000 of restricted stock expense was amortized during fiscal 2021 and 2020, 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, 2021 and 2020, the accrued liability for post-retirement benefits was $125,000 and $184,000, respectively, which was fully funded consistent with actuarially determined estimates of the future obligation.

Comprehensive income

ASC 220, “Comprehensive Income,” requires that realized revenue, expenses, gains and losses be included in net income (loss). Unrealized gains (losses) on available for sale securities and interest-only strips are reported as a separate component of the stockholders’ equity section of the Consolidated Statements of Financial Condition and the change in the unrealized gains (losses) are reported on the Consolidated Statements of Comprehensive Income and Consolidated Statements of Stockholders’ Equity.

Accounting standard updates (“ASU”)

ASU 2016-13:

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and subsequent amendments to the initial guidance in November 2018, ASU No. 2018-19, April 2019, ASU 2019-04, May 2019, ASU 2019-05, November 2019, ASU 2019-11, February 2020, ASU 2020-02 and March 2020, ASU 2020-03, all of which clarifies codification and corrects unintended application of the guidance. In November 2019, the FASB also issued ASU 2019-10, “Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates” extending the adoption date for certain registrants, including the Corporation. These ASUs will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Corporation is evaluating its current expected loss methodology of its loan and investment portfolios to identify the necessary modifications in accordance with these standards and expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. A valuation adjustment to its allowance for loan losses or investment portfolio that is identified in this process will be reflected as a one-time adjustment in equity rather than earnings upon adoption. The Corporation is in the process of compiling historical data that will be used to calculate expected credit losses on its loan portfolio to ensure the Corporation is fully compliant with these ASUs at the adoption date and is evaluating the potential impact adoption that these ASUs will have on the Corporation’s Consolidated Financial Statements. Once adopted, the Corporation anticipates the allowance for loan losses to increase through a one‑time adjustment to retained earnings, however, until the evaluation is complete the magnitude of the potential increase will be unknown.

ASU 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-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 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.

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PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

Note 2: Investment Securities

The amortized cost and estimated fair value of investment securities as of June 30, 2021 and 2020 were as follows:

			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(1)	$	220,448	$	2,209	$	(810)	$	221,847	$	220,448
U.S. SBA securities(2)		1,858		16		0		1,874		1,858
Certificate of deposits		1,000		0		0		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	$	0	$	2,222	$	2,222
U.S. government sponsored enterprise MBS		1,197		14		0		1,211		1,211
Private issue CMO(3)		151		3		0		154		154
Total investment securities - available for sale	$	3,494	$	93	$	0	$	3,587	$	3,587
Total investment securities	$	226,800	$	2,318	$	(810)	$	228,308	$	226,893

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

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

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

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair		Carrying
June 30, 2020	Cost		Gains		(Losses)		Value		Value
(In Thousands)
Held to maturity
U.S. government sponsored enterprise MBS	$	115,763	$	2,636	$	(45)	$	118,354	$	115,763
U.S. SBA securities		2,064		0		(17)		2,047		2,064
Certificate of deposits		800		0		0		800		800
Total investment securities - held to maturity	$	118,627	$	2,636	$	(62)	$	121,201	$	118,627
Available for sale
U.S. government agency MBS	$	2,823	$	120	$	0	$	2,943	$	2,943
U.S. government sponsored enterprise MBS		1,556		21		0		1,577		1,577
Private issue CMO		204		0		(7)		197		197
Total investment securities - available for sale	$	4,583	$	141	$	(7)	$	4,717	$	4,717
Total investment securities	$	123,210	$	2,777	$	(69)	$	125,918	$	123,344

In fiscal 2021 and 2020, the Corporation received MBS principal payments of $52.6 million and $32.1 million, respectively and did not sell any investment securities.  The Corporation purchased MBS totaling $158.0 million and $55.9 million during fiscal 2021 and 2020, respectively.

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PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

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

As of June 30, 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	$	0	$	0	$	84,600	$	810
Total investment securities - held to maturity	$	84,600	$	810	$	0	$	0	$	84,600	$	810
Total investment securities	$	84,600	$	810	$	0	$	0	$	84,600	$	810

As of June 30, 2020	Unrealized Holding Losses				Unrealized Holding Losses				Unrealized Holding Losses
(In Thousands)	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Held to maturity
U.S. government sponsored enterprise MBS	$	12,731	$	45	$	0	$	0	$	12,731	$	45
U.S. SBA securities		—		—		2,040		17		2,040		17
Total investment securities - held to maturity	$	12,731	$	45	$	2,040	$	17	$	14,771	$	62
Available for sale
Private issue CMO	$	197	$	7	$	0	$	0	$	197	$	7
Total investment securities - available for sale	$	197	$	7	$	0	$	0	$	197	$	7
Total investment securities	$	12,928	$	52	$	2,040	$	17	$	14,968	$	69

As of June 30, 2021, the Corporation had investment securities with unrealized holding losses of $810,000 that were less than 12 months and NaN that were in an unrealized loss position for more than 12 months, as compared to investment securities at June 30, 2020 with unrealized holding losses of $52,000 that were less than 12 months and $17,000 that were in an unrealized loss position for more than 12 months. The unrealized loss at June 30, 2021 was attributable to 16 U.S. government sponsored enterprise MBS and, based on the nature of the investments, management concluded that such unrealized losses were not other than temporary. The unrealized loss at June 30, 2020 was attributable to 2 U.S. government agency MBS, 1 U.S. SBA security and 3 private issue CMOs, and, based on the nature of the investments, management concluded that such unrealized losses were not other than temporary.  The Corporation does not believe that there was any OTTI at June 30, 2021 and 2020.  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, 2021 and 2020 were as follows:

	June 30, 2021				June 30, 2020
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
(In Thousands)	Cost		Value		Cost		Value
Held to maturity
Due in one year or less	$	1,209	$	1,218	$	800	$	800
Due after one through five years		14,544		15,179		19,389		20,194
Due after five through ten years		90,798		91,780		50,895		52,315
Due after ten years		116,755		116,544		47,543		47,892
Total investment securities - held to maturity	$	223,306	$	224,721	$	118,627	$	121,201
Available for sale
Due in one year or less	$	0	$	0	$	0	$	0
Due after one through five years		0		0		0		0
Due after five through ten years		0		0		0		0
Due after ten years		3,494		3,587		4,583		4,717
Total investment securities - available for sale	$	3,494	$	3,587	$	4,583	$	4,717
Total investment securities	$	226,800	$	228,308	$	123,210	$	125,918

Note 3: Loans Held for Investment

Loans held for investment consisted of the following at June 30, 2021 and 2020:

(In Thousands)	June 30, 2021		June 30, 2020
Mortgage loans:
Single-family	$	268,272	$	298,810
Multi-family		484,408		491,903
Commercial real estate		95,279		105,235
Construction		3,040		7,801
Other		139		143
Commercial business loans		849		480
Consumer loans		95		94
Total loans held for investment, gross		852,082		904,466
Advance payments of escrows		157		68
Deferred loan costs, net		6,308		6,527
Allowance for loan losses		(7,587)		(8,265)
Total loans held for investment, net	$	850,960	$	902,796

The following table sets forth information at June 30, 2021 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 4% and 1% of loans held for investment at June 30, 2021 and June 30, 2020, 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	$	61,331	$	41,705	$	42,063	$	90,951	$	32,222	$	268,272
Multi-family		160,784		127,637		168,683		27,085		219		484,408
Commercial real estate		42,862		33,203		19,061		0		153		95,279
Construction		1,978		0		0		0		1,062		3,040
Other		0		0		0		0		139		139
Commercial business loans		500		0		0		0		349		849
Consumer loans		95		0		0		0		0		95
Total loans held for investment, gross	$	267,550	$	202,545	$	229,807	$	118,036	$	34,144	$	852,082

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, 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		0		0		0		0		0		0		1,767
Substandard		8,288		1,119		0		0		0		0		0		9,407
Total loans held for investment, gross	$	268,272	$	484,408	$	95,279	$	3,040	$	139	$	849	$	95	$	852,082

	June 30, 2020
					Commercial					Other	Commercial
(In Thousands)	Single-family		Multi-family		Real Estate		Construction			Mortgage	Business		Consumer		Total
Pass	$	289,942	$	488,126	$	105,235	$	6,098	$	143	$	445	$	94	$	890,083
Special Mention		3,120		3,777		0		1,703		—		0		0		8,600
Substandard		5,748		0		0		0		—		35		0		5,783
Total loans held for investment, gross	$	298,810	$	491,903	$	105,235	$	7,801	$	143	$	480	$	94	$	904,466

The allowance for loan losses is maintained at a level sufficient to provide for estimated losses based on evaluating known and inherent risks in the loans held for investment and upon management’s continuing analysis of the factors underlying the quality of the loans held for investment. These factors include changes in the size and composition of the loans held for investment, actual loan loss experience, current economic conditions, detailed analysis of individual loans for which full collectability may not be assured, and determination of the realizable value of the collateral securing the loans. Provisions (recoveries) for loan losses are charged (credited) against operations on a quarterly basis, as necessary, to maintain the allowance at appropriate levels. Although management believes it uses the best information available to make such determinations, there can be no assurance that regulators, in reviewing the Corporation’s loans held for investment, will not request the Corporation to significantly increase its allowance for loan losses. Future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly and adversely affected as a result of economic, operating, regulatory, and other conditions beyond the Corporation’s control.

Non-performing loans are charged-off to their fair market values in the period the loans, or portion thereof, are deemed uncollectible, generally after the loan becomes 150 days delinquent for real estate secured first trust deed loans and 120 days delinquent for commercial business or real estate secured second trust deed loans. For loans that were modified from their original terms, were re-underwritten and identified in the Corporation’s asset quality reports as restructured loans, the charge-off occurs when the loan becomes 90 days delinquent; and where borrowers file bankruptcy, the charge-off occurs when the loan becomes 60 days delinquent. The amount of the charge-off is determined by comparing the loan balance to the estimated fair value of the underlying collateral, less disposition costs, with the loan balance in excess of the estimated fair value charged-off against the allowance for loan losses. The allowance for loan losses for non-performing loans is determined by applying ASC 310, “Receivables.”  For restructured loans that are less than 90 days delinquent, the allowance for loan losses are segregated into (a) individually evaluated allowances for those loans with applicable discounted cash flow calculations still in their restructuring period, classified lower than pass, and containing an embedded loss component or (b) collectively evaluated allowances based on the aggregated pooling method. For non-performing loans less than 60 days delinquent where the borrower has filed bankruptcy, the collectively evaluated allowances are assigned based on the aggregated pooling method. For non-performing commercial real estate loans, individually evaluated allowances are calculated based on their fair values and if their fair values are higher than their loan balances, 0 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, 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)			0			12			1			(708)
Recoveries		31			0			0			0			0			0			1			32
Charge-offs		0			0			0			0			0			0			(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 impairment	$	384		$	0		$	0		$	0		$	0		$	0		$	0		$	384
Collectively evaluated for impairment		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 impairment	$	8,039		$	0		$	0		$	0		$	0		$	0		$	0		$	8,039
Collectively evaluated for impairment		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	%

	Year Ended June 30, 2020
							Commercial									Commercial
(In Thousands)	Single-family			Multi-family			Real Estate			Construction			Other Mortgage			Business			Consumer			Total
Allowance at beginning of period	$	2,709		$	3,219		$	1,050		$	61		$	3		$	26		$	8		$	7,076
(Recovery) provision for loan losses		(156)			1,110			60			110			0			(2)			(3)			1,119
Recoveries		70			0			0			0			0			0			2			72
Charge-offs		(1)			0			0			0			0			0			(1)			(2)
Allowance for loan losses, end of period	$	2,622		$	4,329		$	1,110		$	171		$	3		$	24		$	6		$	8,265
Allowance:
Individually evaluated for impairment	$	96		$	0		$	0		$	0		$	0		$	4		$	0		$	100
Collectively evaluated for impairment		2,526			4,329			1,110			171			3			20			6			8,165
Allowance for loan losses, end of period	$	2,622		$	4,329		$	1,110		$	171		$	3		$	24		$	6		$	8,265
Gross Loans:
Individually evaluated for impairment	$	3,371		$	0		$	0		$	0		$	0		$	35		$	0		$	3,406
Collectively evaluated for impairment		295,439			491,903			105,235			7,801			143			445			94			901,060
Total loans held for investment, gross	$	298,810		$	491,903		$	105,235		$	7,801		$	143		$	480		$	94		$	904,466
Allowance for loan losses as a percentage of gross loans held for investment		0.88	%		0.88	%		1.05	%		2.19	%		2.10	%		5.00	%		6.38	%		0.91	%

95

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

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)	2021		2020
Balance, beginning of year	$	8,265	$	7,076
(Recovery) provision for loan losses		(708)		1,119
Recoveries		32		72
Charge-offs		(2)		(2)
Balance, end of year	$	7,587	$	8,265

The following tables identify the Corporation’s total recorded investment in non-performing loans by type at the dates and for the years indicated. Generally, a loan is placed on non-accrual status when it becomes 90 days past due as to principal or interest or if the loan is deemed impaired, after considering economic and business conditions and collection efforts, where the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. 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, 2021
	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	$	7,400	$	0	$	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		0		1,119		(338)		781		374		15
Total multi-family loans		1,119		0		1,119		(338)		781		374		15
Commercial business loans:
With a related allowance		0		0		0		—		0		13		1
Total commercial business loans		0		0		0		—		0		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.

96

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

	At or For the Year Ended June 30, 2020
	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	$	3,289	$	0	$	3,289	$	(438)	$	2,851	$	1,541	$	60
Without a related allowance(2)		2,509		(467)		2,042		—		2,042		2,572		119
Total single-family loans		5,798		(467)		5,331		(438)		4,893		4,113		179
Construction:
Without a related allowance(2)		0		0		0		—		0		271		20
Total construction loans		0		0		0		0		0		271		20
Commercial business loans:
With a related allowance		35		0		35		(4)		31		42		4
Total commercial business loans		35		0		35		(4)		31		42		4
Total non-performing loans	$	5,833	$	(467)	$	5,366	$	(442)	$	4,924	$	4,426	$	203

(1) Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan.

(2) There was no related allowance for loan losses because 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 and 2020, there were 0 commitments to lend additional funds to those borrowers whose loans were classified as non-performing.

During the fiscal years ended June 30, 2021 and 2020, the Corporation’s average investment in non-performing loans was $9.1 million and $4.4 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, 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. In comparison, for the fiscal year ended June 30, 2020, the Bank received $312,000 in interest payments from non-performing loans, of which $203,000 was recognized as interest income. The remaining $109,000 was applied to reduce the loan balances under the cost recovery method.

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, 2021, the Corporation had 4 forbearance loans with a total outstanding balance of $1.8 million, or 0.22 percent of total loans, that were modified and operating under forbearance agreements in accordance with the CARES Act and Interagency Statement.

As of June 30, 2021, 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	$	23,551	56	$	22,654	3	$	897
Multi-family loans	5		2,321	5		2,321	—		—
Commercial real estate loans	3		2,000	2		1,055	1		945
Total loan forbearance	67	$	27,872	63	$	26,030	4	$	1,842

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

97

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

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

									Weighted	Weighted Avg.
				% of				Weighted	Avg. Debt	Forbearance
	Number			Total		Weighted		Avg.	Coverage	Period
(Dollars In Thousands)	of Loans	Amount		Loans		Avg. LTV(1)		FICO(2)	Ratio(3)	Granted(4)
Single-family loans	3	$	897	0.11	%	78	%	696	N/A	14.0
Commercial real estate loans	1		945	0.11	%	48	%	704	1.71x	4.0
Total loans in forbearance	4	$	1,842	0.22	%	61	%	727	1.53x	8.9

(1) Current loan balance in comparison to the original appraised value.

(2) At time of loan origination, borrowers and/or guarantors.

(3) At time of loan origination.

(4) In months.

As of March 31, 2021, the Corporation ceased offering the COVID-19 forbearance relief program and as of June 30, 2021, the Corporation had 0 pending requests for this type of payment relief.

After the payment deferral period, normal loan payments will once again become due and payable. The forbearance amount will be due and payable in full as a balloon payment at the end of the loan term or sooner if the loan becomes due and payable in full at an earlier date. The Corporation believes the steps it is taking are necessary to effectively manage its portfolio and assist the borrowers through the ongoing uncertainty surrounding the duration, impact and government response to the COVID-19 pandemic.

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, 2021
			30-89 Days Past				Total Loans Held for
(In Thousands)	Current		Due		Non-Accrual(1)		Investment, Gross
Mortgage loans:
Single-family	$	259,984	$	0	$	8,288	$	268,272
Multi-family		483,289		0		1,119		484,408
Commercial real estate		95,279		0		0		95,279
Construction		3,040		0		0		3,040
Other		139		0		0		139
Commercial business loans		849		0		0		849
Consumer loans		88		7		0		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.

98

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

	June 30, 2020
			30-89 Days Past				Total Loans Held for
(In Thousands)	Current		Due		Non-Accrual(1)		Investment, Gross
Mortgage loans:
Single-family	$	293,326	$	219	$	5,265	$	298,810
Multi-family		491,903		0		0		491,903
Commercial real estate		105,235		0		0		105,235
Construction		7,801		0		0		7,801
Other		143		0		0		143
Commercial business loans		445		0		35		480
Consumer loans		94		0		0		94
Total loans held for investment, gross	$	898,947	$	219	$	5,300	$	904,466

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

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; 2 loans were upgraded to the pass category; 3 loans were paid off; and 0 loans were converted to real estate owned. For the fiscal year ended June 30, 2020, there were 2 loans that were newly modified from their original terms, re-underwritten or identified as a restructured loan; 1 loan (previously modified) was downgraded; 1 loan was upgraded to the pass category; 2 loans were paid off; and 0 loans were converted to real estate owned. During the fiscal years ended June 30, 2021 and 2020, 0 restructured loans were in default within a 12-month period subsequent to their original restructuring. Additionally, during the fiscal year ended June 30, 2021, there were 12 restructured loans totaling $4.7 million (which were all COVID-19 related forbearance loans prior to their restructuring) that were extended beyond the initial maturity of the modification; while in fiscal 2020, there were 0 restructured loans that were extended beyond the initial maturity of the modification.

As of June 30, 2021, the net outstanding balance of the Corporation's 23 restructured loans was $7.9 million, all were classified as substandard on non-accrual status, except 3 loans totaling $876,000. As of June 30, 2021, $7.7 million, or 97 percent, of the restructured loans were current with respect to their payment status, consistent with their modified terms. As of June 30, 2020, the net outstanding balance of the Corporation's 8 restructured loans was $2.6 million: 1 was classified as special mention on accrual status ($437,000); 1 was classified as substandard on accrual status ($1.4 million); and 6 were classified as substandard on non-accrual status ($1.9 million). As of June 30, 2020, $1.2 million, or 44 percent, of the restructured loans were current with respect to their payment status, consistent with their modified terms. At both June 30, 2021 and June 30, 2020, there were 0 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, 2021 and 2020 :

	At June 30,
(In Thousands)	2021		2020
Restructured loans on non-accrual status:
Mortgage loans:
Single-family	$	6,983	$	2,612
Commercial business loans		0		31
Total		6,983		2,643
Restructured loans on accrual status:
Mortgage loans:
Single-family		876		—
Total		876		—
Total restructured loans	$	7,859	$	2,643

99

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, 2021 and 2020 :

	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	$	0	$	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.

		At June 30, 2020
	Unpaid								Net
	Principal		Related		Recorded				Recorded
(In Thousands)	Balance		Charge-offs		Investment		Allowance(1)		Investment
Mortgage loans:
Single-family:
With a related allowance	$	1,650	$	—	$	1,650	$	(108)	$	1,542
Without a related allowance(2)		1,435		(365)		1,070		—		1,070
Total single-family		3,085		(365)		2,720		(108)		2,612
Commercial business loans:
With a related allowance		35		—		35		(4)		31
Total commercial business loans		35		—		35		(4)		31
Total restructured loans	$	3,120	$	(365)	$	2,755	$	(112)	$	2,643

(1) Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan.

(2) There was no related allowance for loan losses because 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)	2021		2020
Balance, beginning of year	$	1	$	2
Sales and payments		(1)		(1)
Balance, end of year	$	0	$	1

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

100

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

Note 4: Mortgage Loan Servicing and Loans Originated for Sale

The following summarizes the unpaid principal balance of loans serviced for others by the Corporation at the dates indicated:

	At June 30,
(In Thousands)	2021		2020
Loans serviced for Freddie Mac	$	9,658	$	14,210
Loans serviced for Fannie Mae		35,486		64,910
Loans serviced for FHLB – San Francisco		5,304		7,385
Total loans serviced for others	$	50,448	$	86,505

Mortgage servicing assets (“MSA”) are recorded when loans are sold to investors and the servicing of those loans is retained by the Bank. The MSA are subject to interest rate risk and may become impaired when interest rates fall and the borrowers refinance or prepay their mortgage loans. The MSA are derived primarily from single-family loans.

Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and processing foreclosures. Income from servicing loans is reported as loan servicing and other fees in the Corporation’s Consolidated Statements of Operations, and the amortization of MSA is reported as a reduction to the loan servicing income. Loan servicing income includes servicing fees from investors and certain fees collected from borrowers, such as late payment fees. As of June 30, 2021 and 2020, the Corporation held borrowers’ escrow balances related to loans serviced for others of $182,000 and $377,000, respectively.

In estimating fair values of the MSA at June 30, 2021 and 2020, the Corporation used a weighted-average constant prepayment rate (“CPR”) of 21.82% and 26.07%, respectively, and a weighted-average discount rate of 9.10% and 9.11%, respectively. Management obtained CPR estimates from an independent third party and reviewed for reasonableness given current market data. The discount rates were derived from market data. The MSA, which is included in prepaid expenses and other assets in the Consolidated Statements of Financial Condition, had a carrying value of $384,000 and a fair value of $208,000  at June 30, 2021. This compares to the MSA at June 30, 2020 which had a carrying value of $673,000 and a fair value of $382,000. An allowance may be recorded to adjust the carrying value of the MSA to the lower of cost or fair value. As of June 30, 2021, a total allowance of $176,000 was required for MSA, compared to a total allowance of $291,000 for MSA as of June 30, 2020. Total additions to the MSA during the years ended June 30, 2021 and 2020 were $2,000 and $0, respectively. Total amortization of the MSA during the years ended June 30, 2021 and 2020 was $291,000 and $252,000, respectively.

Loans sold to the FHLB – San Francisco were completed under its  Mortgage Partnership Finance (“MPF”) program. Under the MPF, the FHLB – San Francisco absorbs the first 4 basis points of loss by establishing a first loss account and a credit scoring process is used to calculate the maximum recourse amount for the Bank. All losses above the Bank’s maximum recourse are the responsibility of the FHLB – San Francisco. The FHLB – San Francisco pays the Bank a credit enhancement fee on a monthly basis to compensate the Bank for accepting the recourse obligation. As of June 30, 2021, the Bank serviced $5.3 million of loans under this program and has established a recourse liability of $25,000 as compared to $7.4 million of loans serviced and a recourse liability of $70,000 at June 30, 2020.

101

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

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

	Year Ended June 30,
(Dollars In Thousands)	2021			2020
MSA balance, beginning of fiscal year	$	673		$	925
Additions		2			—
Amortization		(291)			(252)
MSA balance, end of fiscal year, before allowance		384			673
Allowance		(176)			(291)
MSA balance, end of fiscal year	$	208		$	382
Fair value, beginning of fiscal year	$	382		$	627
Fair value, end of fiscal year	$	208		$	382
Allowance, beginning of fiscal year	$	291		$	298
Impairment recovery		(115)			(7)
Allowance, end of fiscal year	$	176		$	291
Key Assumptions:
Weighted-average discount rate		9.10	%		9.11	%
Weighted-average prepayment speed		21.82	%		26.07	%

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

	Amount
Year Ending June 30,	(In Thousands)
2022	$	65
2023		53
2024		40
2025		28
2026		21
Thereafter		177
Total estimated amortization expense	$	384

The following table represents the hypothetical effect on the fair value of the Corporation’s MSA using an unfavorable shock analysis of certain key valuation assumptions as of June 30, 2021 and 2020. This analysis is presented for hypothetical purposes only. As the amounts indicate, changes in fair value based on changes in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear.

	Year Ended June 30,
(Dollars In Thousands)	2021			2020
MSA net carrying value	$	208		$	382
CPR assumption (weighted-average)		21.82	%		26.07	%
Impact on fair value with 10% adverse change in prepayment speed	$	(10)		$	(19)
Impact on fair value with 20% adverse change in prepayment speed	$	(18)		$	(35)
Discount rate assumption (weighted-average)		9.10	%		9.11	%
Impact on fair value with 10% adverse change in discount rate	$	(7)		$	(12)
Impact on fair value with 20% adverse change in discount rate	$	(14)		$	(23)

102

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

During fiscal 2021, there was a $147,000 single-family loan sold, as compared to 0 loans sold in fiscal 2020; and there were 0 outstanding loans held for sale at June 30, 2021 and June 30, 2020.

Note 5: Leases

The Corporation accounts for its leases in accordance with ASC 842, which was implemented on July 1, 2019, and requires the Corporation to record liabilities for future lease obligations as well as assets representing the right to use the underlying leased assets. The Corporation’s leases primarily represent future obligations to make payments for the use of buildings, space or equipment for its operations. Liabilities to make future lease payments are recorded in accounts payable, accrued interest and other liabilities, while right-of-use assets are recorded in premises and equipment in the Corporation’s Consolidated Statements of Financial Condition. At June 30, 2021, 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, 2021 and 2020, expenses associated with the Corporation’s leases totaled $866,000 and $825,000, 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, 2021			June 30, 2020
Consolidated Statements of Condition:
Premises and equipment - Operating lease right of use assets	$	2,117	$	2,525
Accounts payable, accrued interest and other liabilities – Operating lease liabilities	$	2,192	$	2,640
	Year Ended June 30,
		2021		2020
Consolidated Statements of Operations:
Premises and occupancy expenses from operating leases(1)	$	797	$	768
Equipment expenses from operating leases	$	69	$	57
Consolidated Statements of Cash Flows:
Operating cash flows from operating leases, net	$	905	$	1,035

(1) Includes immaterial variable lease costs.

103

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, 2021:

	Amount(1)
Year Ending June 30,	(In Thousands)
2022	$	887
2023		506
2024		359
2025		255
2026		236
Thereafter		39
Total contract lease payments	$	2,282
Total liability to make lease payments	$	2,192
Difference in undiscounted and discounted future lease payments	$	90
Weighted average discount rate		1.97	%
Weighted average remaining lease term (years)		3.7

(1) Contractual base rents do not include property taxes and other operating expenses due under respective lease agreements.

Note 6: Premises and Equipment

Premises and equipment at June 30, 2021 and 2020 consisted of the following:

	June 30,
(In Thousands)	2021		2020
Land	$	2,853	$	2,853
Buildings		9,772		9,734
Leasehold improvements		3,033		3,243
Furniture and equipment		5,416		5,290
Automobiles		164		167
Operating lease – right of use assets (1)		2,117		2,525
		23,355		23,812
Less accumulated depreciation and amortization		(13,978)		(13,558)
Total premises and equipment, net	$	9,377	$	10,254

⁽¹⁾ Net of accumulated amortization.

Depreciation and amortization expense for the years ended June 30, 2021 and 2020 amounted to $1.6 million and $1.5 million, respectively.

104

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

Note 7: Deposits

Deposits at June 30, 2021 and 2020 consisted of the following:

	June 30, 2021				June 30, 2020
(Dollars in Thousands)	Interest Rate	Amount			Interest Rate	Amount
Checking deposits – non interest-bearing	—	$	123,179		—	$	118,771
Checking deposits – interest-bearing(1)	0% - 0.20%		327,388		0% - 0.25%		290,463
Savings deposits(1)	0% - 0.70%		307,299		0% - 1.00%		273,769
Money market deposits(1)	0% - 2.00%		39,670		0% - 2.00%		39,989
Time deposits:(1)
Under $100	0.00% - 2.13%		71,026		0.00% - 2.13%		82,180
$100 and over	0.05% - 2.13%		69,411		0.15% - 2.13%		87,797
Total deposits		$	937,973			$	892,969
Weighted-average interest rate on deposits			0.15	%			0.26	%

(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, 2021 and 2020 were as follows:

	June 30,
(In Thousands)	2021		2020
One year or less	$	76,705	$	90,576
Over one to two years		37,687		33,995
Over two to three years		11,230		25,937
Over three to four years		11,923		8,184
Over four to five years		2,493		10,350
Over five years		399		935
Total time deposits	$	140,437	$	169,977

Interest expense on deposits for the years indicated is summarized as follows:

	Year Ended June 30,
(In Thousands)	2021		2020
Checking deposits – interest-bearing	$	188	$	314
Savings deposits		208		496
Money market deposits		80		110
Time deposits		1,269		2,023
Total interest expense on deposits	$	1,745	$	2,943

The Bank is required to maintain reserve balances with the Federal Reserve Bank of San Francisco. Effective March 26, 2020, the Fedreal Reserve lowered the reserve ratios on transaction accounts maintained at a depository institution to 0 percent so there was 0 required reserve balance at June 30, 2021 and 2020.

Note 8: Borrowings

Advances from the FHLB – San Francisco, which mature on various dates through 2025, are collateralized by pledges of certain real estate loans with an aggregate balance at June 30, 2021 and 2020 of $607.0 million and $658.7 million, respectively.  In addition, the Bank pledged investment securities totaling $1.6 million and $2.2 million to collateralize its FHLB – San Francisco advances under the Securities-Backed Credit (“SBC”) program at June 30, 2021 and 2020, 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 $416.2 million and $387.6 million at June 30, 2021 and 2020, respectively.  As of June 30, 2021 and 2020, the remaining/available borrowing facility was $296.8 million and $228.1 million, respectively, and the remaining/available collateral was $343.1 million and $351.5 million, respectively.

105

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

In addition, as of June 30, 2021 and 2020, the Bank had a $206.1 million and $94.4 million discount window facility, respectively, at the Federal Reserve Bank of San Francisco, collateralized by investment securities with a fair market value of $219.2 million and $100.4 million, respectively.  As of June 30, 2021 and 2020, the Bank also had a borrowing arrangement in the form of a federal funds facility with its correspondent bank for $17.0 million at both dates.  The Bank intends to request a renewal of its borrowing arrangement with the correspondent bank prior to maturity. As of both June 30, 2021 and 2020, there were 0 outstanding borrowings under the discount window facility or the federal funds facility with the correspondent bank.

Borrowings at June 30, 2021 and 2020 consisted of the following:

	June 30,
(In Thousands)	2021		2020
FHLB - San Francisco advances	$	100,983	$	141,047

In addition to the total borrowings described above, the Bank utilizes its borrowing facility for letters of credit and MPF credit enhancement.  The outstanding letters of credit at June 30, 2021 and 2020 were $16.0 million at both dates; and the outstanding MPF credit enhancement was $2.5 million at both, June 30, 2021 and June 30, 2020.

As a member of the FHLB – San Francisco, the Bank is required to maintain a minimum investment in FHLB – San Francisco capital stock.  The Bank held a stock investment of $8.2 million with 0 excess capital stock at June 30, 2021.  This compares to a stock investment of $8.0 million with excess capital stock of $1.1 million at June 30, 2020.

During fiscal 2021, the FHLB – San Francisco did 0t redeem any of the excess capital stock, while the Bank purchased $185,000 of FHLB - San Francisco capital stock. During fiscal 2020, the FHLB – San Francisco redeemed $229,000 of the excess capital stock, while the Bank did not purchase any FHLB - San Francisco capital stock. In fiscal 2021 and 2020, the FHLB – San Francisco distributed $418,000 and $534,000 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)	2021			2020
Balance outstanding at the end of year:
FHLB - San Francisco advances	$	100,983		$	141,047
Weighted-average rate at the end of year:
FHLB - San Francisco advances		2.19	%		2.23	%
Maximum amount of borrowings outstanding at any month end:
FHLB - San Francisco advances	$	141,042		$	141,057
Average short-term borrowings during the year with respect to:(1)
FHLB - San Francisco advances	$	35,631		$	11,562
Weighted-average short-term borrowing rate during the year with respect to:(1)
FHLB - San Francisco advances		2.14	%		3.30	%

(1) Borrowings with a remaining term of 12 months or less.

106

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

The aggregate annual contractual maturities of borrowings at June 30, 2021 and 2020 were as follows:

	June 30,
(Dollars in Thousands)	2021			2020
Within one year	$	20,983		$	30,000
Over one to two years		30,000			31,047
Over two to three years		30,000			30,000
Over three to four years		20,000			30,000
Over four to five years		0			20,000
Over five years		0			0
Total borrowings	$	100,983		$	141,047
Weighted average interest rate		2.19	%		2.23	%

Note 9: Income Taxes

ASC 740, “Income Taxes,” requires the affirmative evaluation that it is more likely than not, based on the technical merits of a tax position, that an enterprise is entitled to economic benefits resulting from positions taken in income tax returns. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. Management has determined that there were 0 unrecognized tax benefits to be reported in the Corporation’s consolidated financial statements for the years ended June 30, 2021 and 2020.

Under generally accepted accounting principles, the Corporation uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. On March 18, 2020, the Families First Coronavirus Response Act (the "Families First Act") was enacted.

Additionally, on March 27, 2020, the CARES Act was enacted. Pursuant to ASC 740-10-25-47, the effects of the new federal legislation are recognized upon enactment, which is the date the president signs a bill into law. The Corporation believes it has applied the provisions of the Families First Act and CARES Act in accordance with ASC 740.

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

The Corporation utilizes the asset and liability method of accounting for income taxes whereby deferred tax assets are recognized for deductible temporary differences and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences.  Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis.  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.  

107

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

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

	Year Ended June 30,
(In Thousands)	2021		2020
Current:
Federal	$	1,547	$	1,742
State		598		919
		2,145		2,661
Deferred:
Federal		303		291
State		178		261
		481		552
Provision for income taxes	$	2,626	$	3,213

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 2021 and 2020 was $91,000 and $8,000, 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,
	2021				2020
(In Thousands)	Amount		Tax Rate		Amount		Tax Rate
Federal income tax at statutory rate	$	2,139	21.00	%	$	2,289	21.00	%
State income tax, net of federal income tax benefit		614	6.05	%		930	8.53	%
Changes in taxes resulting from:
Bank-owned life insurance		(40)	(0.39)	%		(40)	(0.36)	%
Non-deductible expenses		6	0.06	%		41	0.37	%
Non-deductible stock-based compensation		(30)	(0.30)	%		(10)	(0.09)	%
Excess tax benefit on stock-based compensation		(64)	0	%		(7)	(0.07)	%
Return to provision adjustment		0	0	%		7	0.06	%
Other		1	(0.64)	%		3	0.02	%
Effective income tax	$	2,626	25.78	%	$	3,213	29.46	%

Deferred tax assets at June 30, 2021 and 2020 by jurisdiction were as follows:

	June 30,
(In Thousands)	2021		2020
Deferred taxes - federal	$	1,617	$	1,908
Deferred taxes - state		926		1,103
Total net deferred tax assets	$	2,543	$	3,011

108

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

Net deferred tax assets at June 30, 2021 and 2020 were comprised of the following:

	June 30,
(In Thousands)	2021		2020
Loss reserves	$	2,734	$	3,034
Non-accrued interest		392		326
Deferred compensation		2,512		2,824
Accrued vacation		197		177
Depreciation		153		90
Other		307		395
Total deferred tax assets		6,295		6,846
FHLB - San Francisco stock dividends		(645)		(645)
Prepaid expenses		(41)		(41)
Unrealized gain on investment securities		(27)		(40)
Unrealized gain on interest-only strips		(3)		(4)
Deferred loan costs		(2,974)		(3,071)
State tax		(62)		(34)
Total deferred tax liabilities		(3,752)		(3,835)
Net deferred tax assets	$	2,543	$	3,011

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, 2021 and 2020, the Corporation had 0 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, 2021 and 2020 and management believes it is more likely than not the Corporation will realize its deferred tax asset.

Retained earnings at June 30, 2021 and 2020 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 2018 and thereafter remain subject to federal examination, while the California state tax returns for fiscal years 2017 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, 2021 and 2020, there were 0 tax penalties and 0 interest charges arising from federal or state taxes.

Note 10: Capital

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by

109

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements. 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, 2021, it would have exceeded all regulatory capital requirements.

The Bank is subject to capital regulations which establish minimum required ratios for common equity Tier 1 capital (“CET1”), Tier1 and total capital require an additional capital conservation buffer over the required minimum capital ratios, and defines what qualifies as capital for purposes of meeting the capital requirements.  Failure to meet minimum requirements can initiate certain mandatory and possibly additional discretionary actions by bank regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements.

In addition to the minimum CET1, Tier 1 and total capital ratios, the Bank must maintain a capital conservation buffer consisting of additional CET1 capital above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions.  As of June 30, 2021, the capital conservation buffer of a minimum of 2.50% of risk weighted assets.

For calendar 2020 and thereafter, the minimum requirements call for a Tier1 leverage ratio of 4.00%, a CET1 ratio to total risk-weighted assets (“CET1 risk-based ratio”) of 7.00%, a Tier 1 capital ratio of 8.50%, and a total capital ratio of 10.50%.

Under the standards, in order to be considered well-capitalized, the Bank must have at minimum a Tier1 leverage ratio of 5.00%, a CET1 capital ratio of 6.50%, a Tier 1 capital ratio of 8.00%, and a total capital ratio of 10.00%.

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, 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	%
As of June 30, 2020
Tier 1 leverage capital (to adjusted average assets)	$	116,967	10.13	%	$	46,188	4.00	%	$	57,735	5.00	%
CET1 capital (to risk-weighted assets)	$	116,967	17.51	%	$	46,747	7.00	%	$	43,408	6.50	%
Tier 1 capital (to risk-weighted assets)	$	116,967	17.51	%	$	56,765	8.50	%	$	53,426	8.00	%
Total capital (to risk-weighted assets)	$	125,316	18.76	%	$	70,121	10.50	%	$	66,782	10.00	%

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

110

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

At June 30, 2021, the Bank exceeded all regulatory capital requirements. The Bank was categorized as "well-capitalized" at June 30, 2021 under the regulations of the OCC.

The ability of the Corporation to pay dividends to stockholders depends primarily on the ability of the Bank to pay dividends to the Corporation. The Bank may not declare or pay cash dividends on or repurchase any of its shares of common stock, if the effect would cause stockholders’ equity to be reduced below applicable regulatory capital maintenance requirements or if such declaration and payment would otherwise violate regulatory requirements.

Generally, savings institutions, such as the Bank, that before and after the proposed distribution are well-capitalized, may make capital distributions during any calendar year up to 100% of net income for the year-to-date plus retained net income for the two preceding years. However, an institution deemed to be in need of more than normal supervision or in troubled condition by the OCC may have its dividend authority restricted by the OCC. If the Bank, however, proposes to make a capital distribution when it does not meet its capital requirements (or will not following the proposed capital distribution) or that will exceed these net income-based limitations, it must obtain the OCC's approval prior to making such distribution.  In addition, the Bank must file a prior written notice of a dividend with the Federal Reserve Board (“FRB”). The FRB or the OCC may object to a capital distribution based on safety and soundness concerns.  Additional restrictions on Bank dividends may apply if the Bank fails the Qualified Thrift Lender test.  In fiscal 2021 and 2020, the Bank declared $5.0 million and $7.5 million of cash dividends to its parent, the Corporation, respectively.

Note 11: Benefit Plans

The Corporation has a 401(k) defined-contribution plan covering all employees meeting specific age and service requirements.  Under the plan, employees may contribute to the plan from their pretax compensation up to the limits set by the Internal Revenue Service. The Corporation makes matching contributions up to 3%of a participants’ pretax compensation. Participants vest immediately in their own contributions with 100% vesting in the Corporation’s contributions occurring after six years of credited service. The Corporation’s expense for the plan was approximately $297,000 and $327,000 for the years ended June 30, 2021 and 2020, respectively.

The Corporation has a multi-year employment agreement and a post-retirement compensation agreement with one executive officer and a post-retirement compensation agreement with another executive officer, which requires payments of certain benefits upon retirement. At June 30, 2021 and 2020, the accrued liability of the post-retirement compensation agreements was $6.6 million and $6.1 million, respectively; costs are being accrued and expensed annually. For fiscal 2021 and 2020, the accrued expense for these liabilities was $563,000 and $427,000, 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, 2021 and 2020, the total outstanding cash surrender value of the BOLI was $8.0 million and $7.8 million, respectively.  For fiscal 2021 and 2020, the total BOLI non-taxable income, net of mortality cost was $191,000 and $189,000, 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 2021, there were 40,000 shares that were purchased in the open market and 0 cash contributions to fulfill the annual discretionary allocation.  This compares to fiscal 2020 when the Corporation purchased  32,000 shares in the open market and 0 cash contributions to fulfill the annual discretionary allocation.  Since the annual contributions are discretionary, the benefits payable under the ESOP cannot be estimated.

Benefits generally become 100% vested after six years of credited service.  Vesting accelerates upon retirement, death or disability of the participant or in the event of a change in control of the Corporation.  Forfeitures are reallocated among remaining participating employees in the same proportion as contributions.  Benefits are payable upon death, retirement, early retirement, disability or separation from service.

111

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

The net expense related to the ESOP for the years ended June 30, 2021and 2020 was $577,000 and $602,000 respectively. Available shares and cash contributions, if any, are allocated every calendar year end; and the total allocated at December 31, 2020 and 2019 were 40,000 shares and 0 cash contributions at both dates.

Note 12: Incentive Plans

As of June 30, 2021, the Corporation had three share-based compensation plans, which are described below.  These plans are the 2013 Equity Incentive Plan (“2013 Plan”), the 2010 Equity Incentive Plan (“2010 Plan”) and the 2006 Equity Incentive Plan (“2006 Plan”). For the years ended June 30, 2021 and 2020, the compensation cost for these plans was $1.3 million and $954,000, respectively.

Equity Incentive Plans. The Corporation established and the shareholders approved the 2013 Plan, the 2010 Plan and the 2006 Plan (collectively, the “Plans”) for directors, advisory directors, directors emeriti, officers and employees of the Corporation and its subsidiary. The 2013 Plan authorizes 300,000 stock options and 300,000 shares of restricted stock.  The 2013 Plan also provides that no person may be granted more than 60,000 stock options or 45,000 shares of restricted stock in any one year.  The 2010 Plan authorizes 586,250 stock options and 288,750 shares of restricted stock.  The 2010 Plan also provides that no person may be granted more than 117,250 stock options or 43,312 shares of restricted stock in any one year.  The 2006 Plan authorized 365,000 stock options and 185,000 shares of restricted stock. No new awards can be granted from the 2010 and 2006 Plan.

Equity Incentive Plans - Stock Options.  Under the Plans, options may not be granted at a price less than the fair market value at the date of the grant.  Options typically vest over a five-year or shorter period as long as the director, advisory director, director emeritus, officer or employee remains in service to the Corporation.  The options are exercisable after vesting for up to the remaining term of the original grant.  The maximum term of the options granted is 10 years.

The fair value of each option grant is estimated using the Black-Scholes option valuation model with the following assumptions as of the grant date for the periods indicated.  The expected volatility is based on implied volatility from historical common stock closing prices for the prior 84 months.  The expected dividend yield is based on the most recent quarterly dividend on an annualized basis.  The expected term is based on the historical experience of all fully vested stock option grants and is reviewed annually.  The risk-free interest rate is based on the U.S. Treasury note rate with a term similar to the underlying stock option on the particular grant date.

In fiscal 2021, there were 0 options granted under the Plans, while 132,000 options were exercised and 5,500 options were forfeited. In fiscal 2020, there were 0 options granted under the Plans, while 16,250 options were exercised and 0 options were forfeited.

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

112

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

The following tables summarize the stock option activity in the Plans during the years ended June 30, 2021 and 2020:

				Weighted-
		Weighted-		Average	Aggregate
		Average		Remaining	Intrinsic
		Exercise		Contractual	Value
Options	Shares	Price		Term (Years)	($000)
Outstanding at June 30, 2019	570,750	$	14.05
Granted	0	$	0
Exercised	(16,250)	$	13.27
Forfeited	0	$	0
Outstanding at June 30, 2020	554,500	$	14.07	4.22	$	807
Vested and expected to vest at June 30, 2020	533,900	$	13.84	4.06	$	534
Exercisable at June 30, 2020	451,500	$	12.70	3.23	$	807
Outstanding at June 30, 2020	554,500	$	14.07
Granted	0	$	0
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

As of June 30, 2021 and 2020, there was $114,000 and $211,000 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 1.9 years and 2.6 years, respectively.  The forfeiture rate during both fiscal 2021 and 2020 was 20 percent, and was calculated by using the historical forfeiture experience of all fully vested stock option grants which is reviewed annually.

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 2021, 0 shares of restricted stock were awarded under the Plans, while 112,750 shares were vested and distributed, and 11,500 shares were forfeited. In fiscal 2020, 0 shares of restricted stock were awarded under the Plans and 0 shares were vested and distributed, while 8,000 shares were forfeited. As of June 30, 2021 and 2020, there were 62,750 and 51,250 shares available for future awards under the Plans, respectively.

113

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

The following table summarizes the restricted stock activity for the years ended June 30, 2021 and 2020:

		Weighted-Average
		Award Date
Unvested Shares	Shares	Fair Value
Unvested at June 30, 2019	233,500	$	18.55
Awarded	0	$	0
Vested	—	$	—
Forfeited	(8,000)	$	18.57
Unvested at June 30, 2020	225,500	$	18.55
Expected to vest at June 30, 2020	180,400	$	18.55
Unvested at June 30, 2020	225,500	$	18.55
Awarded	0	$	0
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

As of June 30, 2021 and 2020, the unrecognized compensation expense was $1.8 million and $3.2 million, respectively, related to unvested share-based compensation arrangements with respect to restricted stock issued under the Plans, and reported as a reduction to stockholders’ equity.  This expense is expected to be recognized over a weighted-average period of 1.9 years and 2.9 years, respectively.  Similar to stock options, a forfeiture rate of 20 percent has been applied to the restricted stock compensation expense calculations in fiscal 2021 and 2020.  For the fiscal years ended June 30, 2021 and 2020, the fair value of shares vested and distributed was $2.1 million and $0, respectively.

Note 13: Earnings Per Share

Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the earnings of the Corporation.

As of June 30, 2021 and 2020, there were outstanding options to purchase 417,000 shares and 554,500 shares of the Corporation’s common stock, respectively, of which 116,000 shares and 419,500 shares, respectively, were excluded from the diluted EPS computation as their effect was anti-dilutive. As of June 30, 2021 and 2020, there were outstanding restricted stock awards of 101,250 shares and 225,500 shares, respectively.

The following table provides the basic and diluted EPS computations for the fiscal years ended June 30, 2021 and 2020, respectively:

	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

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Notes to Consolidated Financial Statements

	For the Year Ended June 30, 2020
	Income		Shares	Per-Share
(Dollars in Thousands, Except Share Amount)	(Numerator)		(Denominator)	Amount
Basic EPS	$	7,689	7,467,577	$	1.03
Effect of dilutive shares:
Stock options			71,307
Restricted stock			37,298
Diluted EPS	$	7,689	7,576,182	$	1.01

Note 14: Commitments and Contingencies

Periodically, there have been various claims and lawsuits involving the Corporation, such as claims to enforce liens, condemnation proceedings on properties in which the Corporation holds security interests, claims involving the making and servicing of real property loans, employment matters and other issues in the ordinary course of and incidental to the Corporation’s business.  These proceedings and the associated legal claims are often contested and the outcome of individual matters is not always predictable.  Additionally, in some actions, it is difficult to assess potential exposure because the Corporation is still in the early stages of the litigation. The Corporation is not a party to any pending legal proceedings that it believes would have a material adverse effect on its financial condition, operations or cash flows.

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)
2022	$	1,865
2023		744
2024		394
2025		289
2026		250
Thereafter		39
Total minimum payments required	$	3,581

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

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, 2021 and 2020, the Bank maintained a non-contingent recourse liability related to these representations and warranties of $175,000 and $200,000, respectively.  In addition, the Bank maintained a recourse liability of $25,000 and $70,000 at June 30, 2021 and 2020, 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

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Notes to Consolidated Financial Statements

agreements; such as, loan sale agreements, litigation settlement agreements, confidentiality agreements, loan servicing agreements, leases and subleases, among others, in which the Corporation agrees to indemnify third parties for acts by the Corporation’s agents, assignees and/or sub-lessees, and employees. Due to the nature of these indemnification provisions, the Corporation cannot calculate its aggregate potential exposure.

Pursuant to their governing instruments, the Corporation and its subsidiaries provide indemnification to directors, officers, employees and, in some cases, agents of the Corporation against certain liabilities incurred as a result of their service on behalf of or at the request of the Corporation and its subsidiaries. It is not possible for the Corporation to determine the aggregate potential exposure resulting from the obligation to provide this indemnity.

Note 15: Derivative and Other Financial Instruments with Off-Balance Sheet Risks

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of originating loans or providing funds under existing lines of credit, loan sale commitments to third parties and option contracts. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the accompanying Consolidated Statements of Financial Condition. The Corporation’s exposure to credit loss, in the event of non-performance by the counterparty to these financial instruments, is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in entering into financial instruments with off-balance sheet risk as it does for on-balance sheet instruments. As of June 30, 2021 and 2020, the Corporation had commitments to extend credit on loans to be held for investment of $21.9 million and $13.6 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	2021		2020
(In Thousands)
Undisbursed loan funds – Construction loans	$	4,479	$	4,029
Undisbursed lines of credit – Commercial business loans		460		935
Undisbursed lines of credit – Consumer loans		425		448
Commitments to extend credit on loans to be held for investment		21,887		13,579
Total	$	27,251	$	18,991

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, 2021 and 2020:

	Year Ended
	June 30,
(In Thousands)	2021		2020
Balance, beginning of the year	$	126	$	141
Provision (recovery)		1		(15)
Balance, end of the year	$	127	$	126

Note 16: Fair Value of Financial Instruments

The Corporation adopted ASC 820, “Fair Value Measurements and Disclosures,” and elected the fair value option pursuant to ASC 825, “Financial Instruments” on single-family loans originated for sale.  ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  ASC 825 permits entities to elect to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the “Fair Value Option”) at specified election dates.  At each subsequent reporting date, an entity is

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PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

required to report unrealized gains and losses on items in earnings for which the fair value option has been elected.  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, 2021:
Loans held for investment, at fair value	$	1,874	$	1,934	$	(60)
As of June 30, 2020:
Loans held for investment, at fair value	$	2,258	$	2,369	$	(111)

ASC 820 establishes a three-level valuation hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as follows:

Level 1	-	Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.
Level 2	-	Observable inputs other than Level 1 such as: quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated to observable market data for substantially the full term of the asset or liability.
Level 3	-	Unobservable inputs for the asset or liability that use significant assumptions, including assumptions of risks. These unobservable assumptions reflect the Corporation’s estimate of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of pricing models, discounted cash flow models and similar techniques.

ASC 820 requires the Corporation to maximize the use of observable inputs and minimize the use of unobservable inputs. If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation.

The Corporation’s financial assets and liabilities measured at fair value on a recurring basis consist of investment securities available for sale, loans held for investment at fair value 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 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

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Notes to Consolidated Financial Statements

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.

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, 2021 Using:
(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Investment securities - available for sale:
U.S. government agency MBS	$	0	$	2,222	$	0	$	2,222
U.S. government sponsored enterprise MBS		0		1,211		0		1,211
Private issue CMO		0		0		154		154
Investment securities - available for sale		0		3,433		154		3,587
Loans held for investment, at fair value		0		0		1,874		1,874
Interest-only strips		0		0		10		10
Total assets	$	0	$	3,433	$	2,038	$	5,471
Liabilities:	$	0	$	0	$	0	$	0
Total liabilities	$	0	$	0	$	0	$	0

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PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

	Fair Value Measurement at June 30, 2020 Using:
(In Thousands)		Level 1		Level 2		Level 3		Total
Assets:
Investment securities - available for sale:
U.S. government agency MBS	$	0	$	2,943	$	0	$	2,943
U.S. government sponsored enterprise MBS		0		1,577		0		1,577
Private issue CMO		0		0		197		197
Investment securities - available for sale		0		4,520		197		4,717
Loans held for investment, at fair value		0		0		2,258		2,258
Interest-only strips		0		0		14		14
Total assets	$	0	$	4,520	$	2,469	$	6,989
Liabilities:	$	0	$	0	$	0	$	0
Total liabilities	$	0	$	0	$	0	$	0

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, 2020	$	197	$	2,258	$	14	$	2,469
Total gains or losses (realized/unrealized):
Included in earnings		0		51		0		51
Included in other comprehensive income (loss)		9		0		(4)		5
Purchases		0		0		0		0
Issuances		0		0		0		0
Settlements		(52)		(435)		0		(487)
Transfers in and/or out of Level 3		0		0		0		0
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 estimates of the specific credit risk attributes of each loan, in addition to the quoted secondary-market prices which account for interest rate characteristics.

	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, 2019	$	269	$	5,094	$	16	$	5,379
Total gains or losses (realized/ unrealized):
Included in earnings		0		13		0		13
Included in other comprehensive income (loss)		(14)		0		(2)		(16)
Purchases		0		0		0		0
Issuances		0		0		0		0
Settlements		(58)		(2,849)		0		(2,907)
Transfers in and/or out of Level 3		0		0		0		0
Ending balance at June 30, 2020	$	197	$	2,258	$	14	$	2,469

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

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PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

The following fair value hierarchy table presents information about the Corporation’s assets measured at fair value at the dates indicated on a nonrecurring basis:

	Fair Value Measurement at June 30, 2021 Using:
(In Thousands)	Level 1		Level 2		Level 3		Total
Non-performing loans	$	0	$	899	$	7,747	$	8,646
Mortgage servicing assets		0		0		208		208
Total	$	0	$	899	$	7,955	$	8,854

	Fair Value Measurement at June 30, 2020 Using:
(In Thousands)	Level 1		Level 2		Level 3		Total
Non-performing loans	$	0	$	2,042	$	2,882	$	4,924
Mortgage servicing assets		0		—		382		382
Total	$	0	$	2,042	$	3,264	$	5,306

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, 2021:

						Impact to
	Fair Value					Valuation
	As of					from an
	June 30,		Valuation		Range(1)	Increase in
(Dollars In Thousands)	2021		Techniques	Unobservable Inputs	(Weighted Average)	Inputs(2)
Assets:
Securities available-for sale: Private issue CMO	$	154	Market comparable pricing	Comparability adjustment	1.0% - 1.8% (1.7%)	Increase
Loans held for investment, at fair value	$	1,874	Relative value analysis	Broker quotes	98.0% - 104.0% (101.1%) of par	Increase
				Credit risk factor	1.3% - 100.0% (4.3%)	Decrease
Non-performing loans(3)	$	6,767	Discounted cash flow	Default rates	5.0% - 8.8% (5.4%)	Decrease
Non-performing loans(4)	$	980	Relative value analysis	Credit risk factor	20.0% - 30.0% (28.3%)	Decrease
Mortgage servicing assets	$	208	Discounted cash flow	Prepayment speed (CPR)	16.4% - 60.0% (21.8%)	Decrease
				Discount rate	9.0% - 10.5% (9.1%)	Decrease
Interest-only strips	$	10	Discounted cash flow	Prepayment speed (CPR)	20.1% - 23.0% (22.8%)	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 speeds and discount rates, among others.  Significant increases or decreases in any of these inputs in isolation could result in significantly lower or higher fair value measurement. The

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Notes to Consolidated Financial Statements

various unobservable inputs used to determine valuations may have similar or diverging impacts on valuation. For the fiscal year ended June 30, 2021, there were no significant changes to the Corporation's valuation techniques and inputs that had, or are expected to have, a material impact on its consolidated financial position or results of operations.

The carrying amount and fair value of the Corporation’s other financial instruments as of June 30, 2021 and 2020 were as follows:

	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	$	0	$	0	$	848,727
Investment securities - held to maturity	$	223,306	$	224,721	$	0	$	224,721	$	0
FHLB – San Francisco stock	$	8,155	$	8,155	$	0	$	8,155	$	0
Financial liabilities:
Deposits	$	937,973	$	904,673	$	0	$	0	$	904,673
Borrowings	$	100,983	$	104,526	$	0	$	0	$	104,526

	June 30, 2020
	Carrying		Fair
(In Thousands)	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Loans held for investment, not recorded at fair value	$	900,538	$	902,074	$	0	$	0	$	902,074
Investment securities - held to maturity	$	118,627	$	121,201	$	0	$	121,201	$	0
FHLB – San Francisco stock	$	7,970	$	7,970	$	0	$	7,970	$	0
Financial liabilities:
Deposits	$	892,969	$	864,239	$	0	$	0	$	864,239
Borrowings	$	141,047	$	149,976	$	0	$	0	$	149,976

Loans held for investment, not recorded at fair value: For loans that reprice frequently at market rates, the carrying amount approximates the fair value. For fixed-rate loans, the fair value is determined by either (i) discounting the estimated future cash flows of such loans over their estimated remaining contractual maturities using a current interest rate at which such loans would be made to borrowers, or (ii) quoted market prices.

Investment securities - held to maturity: The investment securities - held to maturity consist of time deposits at CRA qualified minority financial institutions, U.S. SBA securities and U.S. government sponsored enterprise MBS. Due to the short-term nature of the time deposits, the principal balance approximated fair value (Level 2). For the MBS and the U.S. SBA securities, the Corporation utilizes quoted prices in active markets for similar securities for its fair value measurement (Level 2).

FHLB – San Francisco stock: The carrying amount reported for FHLB – San Francisco stock approximates fair value. When redeemed, the Corporation will receive an amount equal to the par value of the stock.

Deposits: The fair value of time deposits is estimated using a discounted cash flow calculation. The discount rate is based upon rates currently offered for deposits of similar remaining maturities. The fair value of transaction accounts (checking, money 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

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Notes to Consolidated Financial Statements

which primarily utilize discounted cash flow techniques and prices obtained from independent management services or brokers. The Corporation performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process.

While the Corporation believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. For the fiscal year ended June 30, 2021, there were no significant changes to the Corporation’s valuation techniques that had, or are expected to have, a material impact on its consolidated financial position or results of operations.

Note 17: Revenue From Contracts With Customers

In accordance with ASC 606, revenues are recognized when goods or services are transferred to the customer in exchange for the consideration the Corporation expects to be entitled to receive. The largest portion of the Corporation’s revenue is from interest income, which is not in the scope of ASC 606. All of the Corporation’s revenue from contracts with customers in the scope of ASC 606 is recognized in non-interest income.

If a contract is determined to be within the scope of ASC 606, the Corporation recognizes revenue as it satisfies a performance obligation. Payments from customers are generally collected at the time services are rendered, monthly, or quarterly. For contracts with customers within the scope of ASC 606, revenue is either earned at a point in time or revenue is earned over time. Examples of revenue earned at a point in time are automated teller machine ("ATM") transaction fees, wire transfer fees, overdraft fees and interchange fees. Revenue is primarily based on the number and type of transactions that are generally derived from transactional information accumulated by the Bank's systems and is recognized immediately as the transactions occur or upon providing the service to complete the customer's transaction. The Corporation is generally the principal in these contracts, with the exception of interchanges fees, in which case the Corporation is acting as the agent and records revenue net of expenses paid to the principal. Examples of revenue earned over time, which generally occur on a monthly basis, are deposit account maintenance fees, investment advisory fees, merchant revenue, trust and investment management fees and safe deposit box fees. Revenue is generally derived from transactional information accumulated by its systems or those of third-parties and is recognized as the related transactions occur or services are rendered to the customer.

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, 2021 and 2020:

	Year Ended June 30,
Type of Services	2021		2020
(In Thousands)
Loan servicing and other fees(1)	$	1,170	$	819
Deposit account fees		1,247		1,610
Card and processing fees		1,605		1,454
Other(2)		551		637
Total non-interest income	$	4,573	$	4,520

(1) Not in scope of ASC 606.

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

For the fiscal years ended June 30, 2021 and 2020, substantially all of the Corporation's revenues within the scope of ASC 606 are for performance obligations satisfied at a specified date.

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PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

Revenues recognized in scope of ASC 606:

Deposit account fees: Fees are earned on the Bank's deposit accounts for various products offered to or services performed for the Bank's customers. Fees include business account fees, non-sufficient fund fees, ATM fees and others. These fees are recognized on a daily, monthly or quarterly basis, depending on the type of service.

Card and processing fees: Debit interchange income represents fees earned when a debit card issued by the Bank is used. The Bank earns interchange fees from cardholder transactions through a third party payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders' debit card. Certain expenses directly associated with the debit cards are recorded on a net basis with the interchange income.

Other: Includes asset management fees, certain loan related fees, stop payment fees, wire services fees, safe deposit box fees and other fees earned on other services, such as merchant services or occasional non-recurring type services, are recognized at the time of the event or the applicable billing cycle. Asset management fees are variable, since they are based on the underlying portfolio value, which is subject to market conditions and amounts invested by customers through a third-party provider. Asset management fees are recognized over the period that services are provided, and when the portfolio values are known or can be estimated at the end of each month. Loan related fees include prepayment fees, late charges, brokered loan fees, maintenance fees and others. These fees are recognized on a daily, monthly, quarterly or annual basis, depending on the type of service.

Note 18: Holding Company Condensed Financial Information

This information should be read in conjunction with the other notes to the consolidated financial statements. The following is the condensed statements of financial condition for Provident Financial Holdings (Holding Company only) as of June 30, 2021 and 2020 and condensed statements of operations and cash flows for the fiscal years ended June 30, 2021 and 2020.

Condensed Statements of Financial Condition

	June 30,
(In Thousands)	2021		2020
Assets
Cash and cash equivalents	$	5,576	$	6,842
Investment in subsidiary		121,696		117,080
Other assets		60		108
	$	127,332	$	124,030
Liabilities and Stockholders’ Equity
Other liabilities	$	52	$	54
Stockholders’ equity		127,280		123,976
	$	127,332	$	124,030

Condensed Statements of Operations

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PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

	Year Ended June 30,
(In Thousands)	2021		2020
Dividend from the Bank	$	5,000	$	7,500
Interest and other income		5		19
Total income		5,005		7,519
General and administrative expenses		1,117		1,166
Earnings before income taxes and equity in undistributed earnings of the Bank		3,888		6,353
Income tax benefit		(328)		(338)
Earnings before equity in undistributed earnings of the Bank		4,216		6,691
Equity in undistributed earnings of the Bank		3,345		998
Net income	$	7,561	$	7,689

Condensed Statements of Cash Flows

	Year Ended June 30,
(In Thousands)	2021		2020
Cash flow from operating activities:
Net income	$	7,561	$	7,689
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of the Bank		(3,345)		(998)
Increase in other assets		48		23
Decrease in other liabilities		(2)		(42)
Net cash provided by operating activities		4,262		6,672
Cash flow from financing activities:
Exercise of stock options		981		215
Treasury stock purchases		(2,336)		(1,283)
Cash dividends		(4,173)		(4,183)
Net cash used for financing activities		(5,528)		(5,251)
Net (decrease) increase in cash during the year		(1,266)		1,421
Cash and cash equivalents at beginning of year		6,842		5,421
Cash and cash equivalents at end of year	$	5,576	$	6,842

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PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

Note 19: Reclassification Adjustment of Accumulated Other Comprehensive Income ("AOCI")

The following table provides the changes in AOCI by component for the fiscal years ended June 30, 2021 and 2020:

	Unrealized Gains and Losses on
	Investment Securities
(Dollars In Thousands, Net of Statutory Taxes)	Available for Sale		Interest-Only Strips		Total
Beginning balance at June 30, 2019	$	150	$	11	$	161
Other comprehensive loss before reclassifications		(56)		(1)		(57)
Amount reclassified from accumulated other comprehensive income		0		0		0
Net other comprehensive loss		(56)		(1)		(57)
Ending balance at June 30, 2020	$	94	$	10	$	104
Other comprehensive loss before reclassifications		(29)		(3)		(32)
Amount reclassified from accumulated other comprehensive income		0		0		0
Net other comprehensive loss		(29)		(3)		(32)
Ending balance at June 30, 2021	$	65	$	7	$	72

Note 20: Subsequent Event

On July 22, 2021, the Corporation announced that the Corporation’s Board of Directors declared a quarterly cash dividend of $0.14 per share. Shareholders of the Corporation’s common stock at the close of business on August 12, 2021 were entitled to receive the cash dividend, which was paid on September 2, 2021.

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