PROVIDENT FINANCIAL HOLDINGS, INC. General
Provident Financial Holdings, Inc. , aDelaware corporation, was organized inJanuary 1996 for the purpose of becoming the holding company ofProvident 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 onJune 27, 1996 . The Corporation is regulated by theFederal Reserve Board ("FRB"). AtMarch 31, 2023 , the Corporation had total assets of$1.34 billion , total deposits of$983.0 million and total stockholders' equity of$129.4 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. As used in this report, the terms "we," "our," "us," and "Corporation" refer toProvident Financial Holdings, Inc. and its consolidated subsidiaries, unless the context indicates otherwise. The Bank, founded in 1956, is a federally chartered stock savings bank headquartered inRiverside, California . The Bank is regulated by theOffice of the Comptroller of the Currency ("OCC"), its primary federal regulator, and theFederal Deposit Insurance Corporation ("FDIC"), the insurer of its deposits. The Bank's deposits are federally insured up to applicable limits by theFDIC . The Bank has been a member of theFederal 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 inRiverside andSan Bernardino counties inCalifornia . Loans are primarily originated and purchased in Southern andNorthern California . There are various risks inherent in the Corporation's business including, among others, the general business environment, interest rates, theCalifornia real estate market, the demand for loans, the prepayment of loans, the repurchase of loans previously sold to investors, the secondary market conditions to buy and sell loans, competitive conditions, legislative and regulatory changes, fraud and other risks. The Corporation began paying quarterly cash dividends during the quarter endedSeptember 30, 2002 . OnJanuary 24, 2023 , the Corporation's Board of Directors declared a quarterly cash dividend of$0.14 per share for the Corporation's shareholders of record at the close of business onFebruary 14, 2023 , which was paid onMarch 7, 2023 . 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. UnderDelaware 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. 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 Unaudited Interim Condensed Consolidated Financial Statements and accompanying selected Notes to Unaudited Interim Condensed Consolidated Financial Statements.
Safe-Harbor Statement
Certain matters in this Form 10-Q constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. This Form
10-Q 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: potential adverse
impacts to economic conditions in our local market areas, other
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markets where the Corporation has lending relationships, or other aspects of the Corporation's business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth, as well as increasing prices and supply chain disruptions, and any governmental or societal responses to new COVID-19 variants; 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 the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; the 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 banking, securities and tax law, and in regulatory policies and principles, or the interpretation of regulatory capital or other rules, and other governmental initiatives affecting the financial services industry; 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 and non-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; the quality and composition of our securities portfolio and the impact of any adverse changes in the securities markets; the inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or theFinancial Accounting Standards Board , including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business; other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services; and other risks detailed in this report and in the Corporation's other reports filed with or furnished to theSEC , including our 2022 Annual Form 10-K. These factors could have an adverse impact on our financial position and our results of operations. Forward-looking statements are based upon management's beliefs and assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking statements included in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur, and you should not put undue reliance on any forward-looking statements. These factors could cause our actual results for the remaining fiscal 2023 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us and could negatively affect the Corporation's consolidated financial condition and consolidated results of operations as well as its stock price performance. 36
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Critical Accounting Estimates
The discussion and analysis of the Corporation's financial condition and results of operations is based upon the Corporation's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe 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 condensed consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions. The Corporation's critical accounting estimates are described in the Corporation's 2022 Annual Form 10-K in the Critical Accounting Policies section of Management's Discussion and Analysis of Financial Condition and Results of Operations and in Note 1 - Organization and Summary of Significant Accounting Policies. There have been no significant changes during the nine months endedMarch 31, 2023 to the critical accounting estimates as described in the Corporation's 2022 Annual Form 10-K.
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 ofSouthern California . The Bank conducts its business operations asProvident 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 customer time deposits in its deposit base and to increase the percentage of lower cost checking and savings accounts. This strategy is intended to improve core revenue through a higher net interest margin and ultimately, coupled with the growth of the Corporation, an increase in net interest income. While the Corporation's long-term strategy is for moderate growth, management recognizes that growth may be challenging given the current general economic conditions and risk of recession. 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 as described in the Corporation's 2022 Annual Form 10-K. 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. TheCalifornia economic environment presents heightened risk for the Corporation primarily with respect to real estate values and loan delinquencies. Since the majority of the 37
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Corporation's loans are secured by real estate located withinCalifornia , significant declines in the value ofCalifornia real estate may also inhibit the Corporation's ability to recover on defaulted loans by selling the underlying real estate.
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, loan sale agreements 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 Condensed 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 6 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements of this Form 10-Q.
Comparison of Financial Condition at
Total assets increased 12 percent to
Total cash and cash equivalents, primarily excess cash deposited with theFederal Reserve Bank of San Francisco , increased$37.4 million , or 160 percent, to$60.8 million atMarch 31, 2023 from$23.4 million atJune 30, 2022 . The increase in total cash and cash equivalents was primarily attributable to management's strategy to increase liquidity due to recent industry instability as a result of several high-profile bank failures. Investment securities (held to maturity and available for sale) decreased$24.8 million , or 13 percent, to$163.6 million atMarch 31, 2023 from$188.4 million atJune 30, 2022 . The decrease was primarily the result of scheduled and accelerated principal payments on mortgage-backed and other securities during the first nine months of fiscal 2023. For further analysis on investment securities, see Note 4 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements of this Form 10-Q. Loans held for investment increased$137.7 million , or 15 percent, to$1.08 billion atMarch 31, 2023 from$940.0 million atJune 30, 2022 , primarily due to an increase in single-family loans. During the first nine months of fiscal 2023, the Corporation originated$212.8 million of loans held for investment, consisting primarily of single-family, multi-family and commercial real estate loans located throughoutCalifornia . The Corporation did not purchase any loans from other institutions during the first nine months of fiscal 2023. Total loan principal payments during the first nine months of fiscal 2023 were$77.2 million , down 57 percent from$180.1 million during the comparable period in fiscal 2022. Single-family loans held for investment atMarch 31, 2023 andJune 30, 2022 was$512.6 million and$378.2 million and represented approximately 48 percent and 40 percent of loans held for investment, respectively. 38
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The tables below describe the geographic dispersion of gross real estate secured loans held for investment atMarch 31, 2023 andJune 30, 2022 , as a percentage of the total dollar amount of loans outstanding:
As of
Inland Southern Other Other
Empire California(1) California States Total
Loan Category Balance % Balance % Balance % Balance % Balance %
Single-family $ 149,311 29 % $ 170,972 33 % $ 192,075 38 % $ 274 - % $ 512,632 100 %
Multi-family 62,500 13 % 273,995 59 % 129,837 28 % - - % 466,332 100 %
Commercial
real estate 17,870 20 % 46,293 51 % 26,333 29 % - - % 90,496 100 %
Construction 2,111 73 % 606 21 % 174 6 % - - % 2,891 100 %
Other - - % 108 100 % - - % - - % 108 100 %
Total $ 231,792 22 % $ 491,974 46 % $ 348,419 32 % $ 274 - % $ 1,072,459 100 %
(1) Other than the Inland Empire.
As ofJune 30, 2022 : Inland Southern Other Other Empire California(1) California States Total Loan Category Balance % Balance % Balance % Balance % Balance % Single-family$ 126,638 33 %$ 112,549 30 %$ 138,767 37 %$ 280 - %$ 378,234 100 % Multi-family 63,764 14 % 275,642 59 % 124,993 27 % 277 - % 464,676 100 % Commercial real estate 20,450 23 % 41,127 45 % 28,852 32 % - - % 90,429 100 % Construction 3,157 98 % 59 2 % - - %
- - % 3,216 100 %
Other - - % 123 100 % - - % - - % 123 100 %
Total $ 214,009 23 % $ 429,500 46 % $ 292,612 31 % $ 557 - % $ 936,678 100 %
(1) Other than the Inland Empire.
For further analysis on loans held for investment, see Note 5 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements of this Form 10-Q.
Total deposits increased$27.5 million , or three percent, to$983.0 million atMarch 31, 2023 from$955.5 million atJune 30, 2022 , primarily due to an increase in time deposits, partly offset by a decrease in transaction accounts. Total uninsured deposits, adjusted lower by collateralized deposits, were approximately$177.8 million and$169.7 million atMarch 31, 2023 andJune 30, 2022 , respectively. Transaction account balances or "core deposits" decreased$57.4 million , or seven percent, to$777.0 million atMarch 31, 2023 from$834.4 million atJune 30, 2022 and time deposits increased$85.0 million , or 70 percent, to$206.1 million atMarch 31, 2023 from$121.1 million atJune 30, 2022 . The increase in time deposits was primarily due to a$95.3 million increase in brokered certificates of deposit with a weighted average cost of 4.37 percent (including broker fees). Excluding brokered certificates of deposit, the percentage of time deposits to total deposits decreased to 12 percent atMarch 31, 2023 from 13 percent atJune 30, 2022 . Brokered certificates of deposit totaled$95.3 million atMarch 31, 2023 . Total borrowings increased$120.0 million , or 141 percent, to$205.0 million atMarch 31, 2023 as compared to$85.0 million atJune 30, 2022 , due to additional borrowings to fund the increase in loans held for investment and to provide for additional liquidity. AtMarch 31, 2023 , borrowings are comprised of short-term and long-term FHLB -San Francisco advances used for liquidity and interest rate risk management purposes. Total stockholders' equity increased to$129.4 million atMarch 31, 2023 from$128.7 million atJune 30, 2022 , primarily as a result of$6.8 million of net income and$660,000 of stock-based compensation in the first nine months of fiscal 2023, partly offset by$3.0 million of cash dividends paid to shareholders and$3.6 million of stock repurchases. The Corporation 39
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repurchased 251,221 shares of its common stock under its
Comparison of Operating Results for the Quarters and Nine Months Ended
Net income for the third quarter of fiscal 2023 was$2.3 million , up$624,000 or 37 percent from$1.7 million in the same period of fiscal 2022. The increase in net income was primarily attributable to a$1.9 million increase in net interest income, partly offset by an$814,000 change to the provision for loan losses to a$169,000 provision for loan losses this quarter in contrast to a$645,000 recovery from the allowance for loan losses in the same quarter last year and a$133,000 decrease in non-interest income, mainly attributable to a decrease in loan prepayment fees. For the first nine months of fiscal 2023, net income was$6.8 million , an increase of$154,000 , or two percent, from$6.6 million in the same period of fiscal 2022. The increase in net income was primarily attributable to a$4.7 million increase in net interest income, partly offset by a$2.5 million change to the provision for loan losses to a$430,000 provision for loan losses in the first nine months of fiscal 2023 in contrast to a$2.1 million recovery from the allowance for loan losses in the same period last year, a$1.2 million increase in non-interest expenses, mainly due to the$1.2 million credit from the Employee Retention Tax Credit ("ERTC") recognized in the first quarter of last year and not replicated this period, and a$611,000 decrease in non-interest income, mainly attributable to a decrease in loan prepayment fees. The Corporation's efficiency ratio, defined as non-interest expense divided by the sum of net interest income and non-interest income, improved to 66.69 percent for the third quarter of fiscal 2023 from 79.74 percent in the same period last year. For the first nine months of fiscal 2023, the Corporation's efficiency ratio improved to 67.33 percent from 73.07 percent for the same period of fiscal 2022. The improvement in the efficiency ratio during the current quarter compared to the same quarter last year was due mainly to higher total revenues. The improvement in the efficiency ratio during the first nine months of fiscal 2023 compared to the same period the prior year was due to higher total revenues, partly offset by higher non-interest expenses. Return on average assets was 0.72 percent in the third quarter of fiscal 2023, up 15 basis points from 0.57 percent in the same period last year. For the first nine months of fiscal 2023, return on average assets was 0.72 percent, down two basis points from 0.74 percent in the same period last year. Return on average stockholders' equity was 7.12 percent in the third quarter of fiscal 2023, up from 5.33 percent in the same period last year. For the first nine months of fiscal 2023, return on average stockholders' equity was 6.94 percent, unchanged from the same period last year. Diluted earnings per share for the third quarter of fiscal 2023 were$0.33 , up 43 percent from$0.23 in the same period last year. For the first nine months of fiscal 2023, diluted earnings per share were$0.94 , up six percent from$0.89 in the same period last year. Net Interest Income: For the Quarters EndedMarch 31, 2023 and 2022. Net interest income increased$1.9 million or 25 percent to$9.4 million from$7.5 million for the same quarter last year. The increase in net interest income was due to a higher net interest margin and, to a lesser extent, higher average earning assets. The higher net interest margin was due to a shift in the composition of interest-earning assets towards higher yielding loans held for investment and an increase in the average yield on interest-earning deposits reflecting recent increases in the targeted federal funds rate, including a 50-basis point increase during the current quarter, to a range of 4.75% to 5.00%; partly offset by increases in the weighted average cost and average balance of customer deposits and borrowings. The net interest margin during the third quarter of fiscal 2023 increased 39 basis points to 3.00 percent from 2.61 percent in the same quarter last year. The average yield on interest-earning assets increased 97 basis points to 3.83 percent in the third quarter of fiscal 2023 from 2.86 percent in the same quarter last year while the average cost of interest-bearing liabilities increased by 65 basis points to 0.93 percent in the third quarter of fiscal 2023 from 0.28 percent in the same quarter last year. The average balance of interest-earning assets increased by nine percent to$1.25 billion in the third quarter of fiscal 2023 from$1.16 billion in the same quarter last year. The increase in earning assets was primarily due to an increase in the average balance of loans receivable, partly 40
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offset by decreases in the average balance of both investment securities and interest-earning deposits. The average balance of interest-bearing liabilities increased by$95.4 million , or nine percent, to$1.14 billion in the third quarter of fiscal 2023 from$1.04 billion in the same quarter last year primarily reflecting an increase in the average balance of borrowings and, to a lesser extent, the average balance of time deposits, partly offset by a decrease in the average balance of transaction accounts. For the Nine Months EndedMarch 31, 2023 and 2022. Net interest income increased$4.7 million or 20 percent to$27.8 million for the first nine months of fiscal 2023 from$23.1 million in the same period in fiscal 2022, as a result of a higher net interest margin and, to a lesser extent, a higher average interest-earning asset balance. The net interest margin was 3.03 percent in the first nine months of fiscal 2023, an increase of 38 basis points from 2.65 percent in the same period of fiscal 2022, primarily due to an increase in the average yield on interest-earning assets which exceeded the increase in the average cost of interest-bearing liabilities. The weighted-average yield on interest-earning assets increased by 68 basis points to 3.61 percent in the first nine months of fiscal 2023 from 2.93 percent in the same period last year, while the weighted-average cost of interest-bearing liabilities increased by 33 basis points to 0.64 percent for the first nine months of fiscal 2023 as compared to 0.31 percent in the same period last year. The average balance of interest-earning assets increased$59.5 million , or five percent, to$1.22 billion in the first nine months of fiscal 2023 from$1.16 billion in the comparable period of fiscal 2022, primarily reflecting an increase in the average balance of loans receivable, partly offset by decreases in the average balance of both investment securities and interest-earning deposits. The average balance of interest-bearing liabilities increased by$58.0 million , or six percent, to$1.11 billion in the first nine months of fiscal 2023 from$1.05 billion in the same period last year primarily reflecting an increase in the average balance of borrowings and, to a lesser extent, the average balance of time deposits, partly offset by a decrease in the average balance of transaction accounts. Interest Income: For the Quarters EndedMarch 31, 2023 and 2022. Total interest income increased$3.7 million , or 45 percent, to$12.0 million for the third quarter of fiscal 2023 as compared to$8.3 million for the same quarter of fiscal 2022. The increase was due primarily to an increase in interest income from loans receivable. Interest income on loans receivable increased by$3.4 million , or 45 percent, to$11.0 million in the third quarter of fiscal 2023 from$7.6 million in the same quarter of fiscal 2022. The increase was due to a higher average balance and a higher average yield. The average balance of loans receivable increased$196.1 million , or 23 percent, to$1.05 billion in the third quarter of fiscal 2023 from$858.3 million in the same quarter last year. Total loans originated and purchased for investment in the third quarter of fiscal 2023 were$53.9 million , down 43 percent from$94.0 million in the same quarter last year. Loan principal payments received in the third quarter of fiscal 2023 were$17.5 million , down 67 percent from$53.6 million in the same quarter last year. The average yield on loans receivable increased by 65 basis points to 4.18 percent in the third quarter of fiscal 2023 from an average yield of 3.53 percent in the same quarter last year. Net deferred loan cost amortization in the third quarter of fiscal 2023 decreased 54 percent to$228,000 from$496,000 in the same quarter last year, attributable primarily to fewer loan payoffs. The higher weighted average loan yield was due primarily to the repricing of adjustable interest rate loans and new loan originations with higher weighted average interest rates. Adjustable-rate loans of approximately$97.4 million were repriced upward in the third quarter of fiscal 2023 by approximately 137 basis points from a weighted average 4.77 percent to 6.14 percent. Interest income from investment securities increased by$33,000 , or six percent, to$548,000 in the third quarter of fiscal 2023 from$515,000 for the same quarter of fiscal 2022. This increase was attributable to a higher average yield, partly offset by a lower average balance. The average yield on investment securities increased 30 basis points to 1.31 percent in the third quarter of fiscal 2023 from 1.01 percent for the same quarter last year. The increase in the average investment securities yield was primarily attributable to a lower premium amortization during the current quarter in comparison to the same quarter last year ($181,000 vs.$328,000 ) due to lower total principal repayments ($6.9 million vs.$12.3 million ) and, to a lesser extent, the upward repricing of adjustable-rate mortgage-backed securities. The average balance of investment securities decreased by$35.5 million , or 17 percent, to$167.7 million in the third quarter of fiscal 2023 from$203.2 million in the same quarter last year. The decrease in the average balance of investment securities was primarily the result of scheduled and accelerated principal payments on
mortgage-backed securities.
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The FHLB - San Francisco distributed a $146,000 cash dividend to the Bank on its
stock in the third quarter of fiscal 2023, up 19 percent from $123,000 in the
same quarter last year. The average balance of FHLB - San Francisco stock in the
third quarter of fiscal 2023 was $8.2 million , virtually unchanged from the same
quarter of fiscal 2022 while the average yield was 7.09 percent, up 106 basis
points from 6.03 percent.
Interest income from interest-earning deposits, primarily cash deposited at the
Federal Reserve Bank of San Francisco , was $286,000 in the third quarter of
fiscal 2023, up 633 percent from $39,000 in the same quarter of fiscal 2022. The
increase was due to a higher average yield, partly offset by a lower average
balance. The average yield earned on interest-earning deposits in the third
quarter of fiscal 2023 was 4.65 percent, up 447 basis points from 0.18 percent
in the same quarter last year, due primarily to an increase in the interest rate
paid on excess reserves. The average balance of interest-earning deposits
decreased by $61.4 million , or 71 percent, to $24.6 million in the third quarter
of fiscal 2023 from $86.0 million in the same quarter last year primarily due to
the utilization of these excess funds for loan portfolio growth.
For the Nine Months Ended
Interest income from loans receivable increased$6.7 million , or 28 percent, to$30.4 million in the first nine months of fiscal 2023 from$23.7 million for the same period of fiscal 2022. The increase was due to a higher average balance and, to a lesser extent, a higher weighted average yield. The average balance of loans receivable increased by$156.8 million , or 18 percent, to$1.01 billion for the first nine months of fiscal 2023 from$855.1 million in the same period of fiscal 2022. Total loans originated and purchased for investment in the first nine months of fiscal 2023 were$212.8 million , down three percent from$220.3 million in the same period last year. Loan principal payments received in the first nine months of fiscal 2023 were$77.2 million , down 57 percent from$180.1 million in the same period last year. The weighted average loan receivable yield during the first nine months of fiscal 2023 increased 31 basis points to 4.00 percent from 3.69 percent in the same period last year. The increase in the average yield on loans receivable was primarily attributable to loans repricing upward, new loan originations with a higher average yield and a decrease in net deferred loan cost amortization to$727,000 in the first nine months of fiscal 2023 from$1.6 million in the same period of fiscal 2022. Adjustable-rate loans of approximately$280.1 million were repriced upward in the first nine months of fiscal 2023 by approximately 108 basis points from a weighted average 4.29 percent to 5.37 percent. Interest income from investment securities increased$266,000 , or 19 percent, to$1.6 million in the first nine months of fiscal 2023 from$1.4 million for the same period of fiscal 2022. This increase was attributable to a higher average yield, partly offset by a lower average balance. The average investment securities yield increased by 38 basis points to 1.24 percent in the first nine months of fiscal 2023 from 0.86 percent in the same period of fiscal 2022. The increase in the average investment securities yield was primarily attributable to a lower premium amortization ($622,000 compared to$1.3 million ) due to lower total principal repayments ($23.8 million vs.$44.8 million ) and, to a lesser extent, the upward repricing of adjustable rate mortgage-backed securities. The average balance of investment securities decreased by$35.2 million , or 17 percent, to$175.8 million in the first nine months of fiscal 2023 from$211.0 million in the same period of fiscal 2022. The decrease in the average balance of investment securities was primarily the result of scheduled and accelerated principal payments on mortgage-backed securities. The FHLB -San Francisco cash dividend received in the first nine months of fiscal 2023 was$414,000 , up 13 percent from$368,000 in the same period of fiscal 2022. The average balance of FHLB -San Francisco stock in the first nine months of fiscal 2023 was$8.2 million , virtually unchanged from the same period of fiscal 2022 while the average yield was 6.70 percent, up 68 basis points from 6.02 percent. Interest income from interest-earning deposits, primarily cash deposited at theFederal Reserve Bank of San Francisco , was$666,000 in the first nine months of fiscal 2023, up 534 percent from$105,000 in the same period of fiscal 2022. The increase was primarily due to a higher average yield. The average yield earned on interest-earning deposits increased by 346 basis points to 3.62 percent in the first nine months of fiscal 2023 from 0.16 percent in the comparable period last year, due primarily to an increase in the interest rate paid on excess reserves. The average balance of the interest-earning deposits in the first nine months of fiscal 2023 was$24.2 million , a decrease of$62.2 million or 72 percent, from$86.4 million in the same period of fiscal 2022. 42 Table of Contents Interest Expense: For the Quarters EndedMarch 31, 2023 and 2022. Total interest expense increased by$1.9 million or 262 percent to$2.6 million in the third quarter of fiscal 2023 from$720,000 in the same quarter last year. The increase was attributable to higher interest expense on borrowings and time deposits, particularly brokered certificates of deposit. Interest expense on deposits for the third quarter of fiscal 2023 was$879,000 , a 221 percent increase from$274,000 for the same period last year. The increase in interest expense on deposits was attributable to a higher average balance and cost of time deposits. The average cost of deposits was 0.37 percent for the third quarter of fiscal 2023, up 25 basis points from 0.12 percent in the same quarter last year, attributable primarily to the average cost of time deposits (mainly brokered certificates of deposit) which increased 131 basis points to 1.87% for the third quarter of fiscal 2023 from 0.56 percent in the same quarter of fiscal 2022. The average balance of deposits decreased slightly to$962.0 million in the third quarter of fiscal 2023 from$963.1 million in the same quarter last year due to decreases in transaction accounts which was mainly offset by an increase in brokered certificates of deposit. Interest expense on borrowings, consisting of FHLB -San Francisco advances, for the third quarter of fiscal 2023 increased$1.3 million , or 287 percent, to$1.7 million from$446,000 for the same period last year. The increase was primarily the result of a higher average balance and, to a lesser extent, a higher average cost. The average balance of borrowings increased by$96.5 million or 121 percent to$176.5 million in the third quarter of fiscal 2023 from$80.0 million in the same quarter last year and the average cost of borrowings increased by 171 basis points to 3.97 percent in the third quarter of fiscal 2023 from 2.26 percent in the same quarter last year. For the Nine Months EndedMarch 31, 2023 and 2022. Total interest expense increased$2.9 million , or 120 percent to$5.3 million in the first nine months of fiscal 2023 from$2.4 million in the same period last year. This increase was attributable primarily to interest expense on borrowing and, to a lesser extent, interest expense on time deposits Interest expense on deposits for the first nine months of fiscal 2023 was$1.7 million , a$782,000 or 88 percent increase from$889,000 for the same period last year. The increase in interest expense on deposits was primarily attributable to a higher average cost of time deposits. The average cost of deposits was 0.23 percent, up 11 basis points from 0.12 percent in the same period last year, attributable primarily to time deposits (mainly brokered certificates of deposit) which increased 65 basis points to 1.24% for the first nine months of fiscal 2023 from 0.59% in the same period in fiscal 2022. The average balance of deposits increased slightly to$962.2 million in the first nine months of fiscal 2023 from$959.2 million in the same period last year due to increases in time deposits (particularly brokered certificates of deposit) and savings deposits, partly offset by a decrease in checking and money market deposits. Interest expense on borrowings, consisting primarily of FHLB -San Francisco advances, for the first nine months of fiscal 2023 increased by$2.2 million , or 138 percent, to$3.7 million from$1.5 million in the same period last year. The increase in interest expense on borrowings was primarily the result of a higher average balance and, to a lesser extent, a higher average cost. The average balance of borrowings increased by$54.9 million or 62 percent to$143.9 million in the first nine months of fiscal 2023 from$89.0 million in the same period last year and the average cost of borrowings increased by 108 basis points to 3.38 percent in the first nine months of fiscal 2023 from 2.30 percent in the same period last year. 43 Table of Contents The following tables present the average balance sheets for the quarters and nine months endedMarch 31, 2023 and 2022, respectively. Average balances include loans accounted for on a non-accrual basis. Amortization of net deferred loan fees/costs is included with interest income on loans receivable. Average Balance Sheets Quarter Ended Quarter Ended March 31, 2023 March 31, 2022 Average Yield/ Average Yield/ (Dollars In Thousands) Balance Interest Cost Balance Interest Cost Interest-earning assets: Loans receivable, net(1)$ 1,054,431 $ 11,028 4.18 %$ 858,300 $ 7,581 3.53 % Investment securities 167,679 548 1.31 % 203,171 515 1.01 % FHLB -San Francisco stock 8,239 146 7.09 % 8,155 123 6.03 % Interest-earning deposits 24,615 286 4.65 % 86,007 39 0.18 % Total interest-earning assets 1,254,964 12,008 3.83 % 1,155,633 8,258 2.86 % Non interest-earning assets 32,416 32,346 Total assets$ 1,287,380 $ 1,187,979 Interest-bearing liabilities: Checking and money market accounts(2)$ 475,958 $ 56 0.05 %$ 505,126 $ 54 0.04 % Savings accounts 316,980 42 0.05 % 328,757 42 0.05 % Time deposits 169,105 781 1.87 % 129,229 178 0.56 % Total deposits(3) 962,043 879 0.37 % 963,112 274 0.12 % Borrowings 176,501 1,728 3.97 % 80,000 446 2.26 % Total interest-bearing liabilities 1,138,544 2,607 0.93 % 1,043,112 720 0.28 % Non interest-bearing liabilities 18,291 17,348 Total liabilities 1,156,835 1,060,460 Stockholders' equity 130,545 127,519 Total liabilities and stockholders' equity$ 1,287,380 $ 1,187,979 Net interest income$ 9,401 $ 7,538 Interest rate spread(4) 2.90 % 2.58 % Net interest margin(5) 3.00 %
2.61 %
Ratio of average
interest- earning
assets to average
interest-bearing
liabilities 110.23 % 110.79 %
Return on average
assets 0.72 % 0.57 %
Return on average
equity 7.12 % 5.33 %
(1) Includes the average balance of non-performing loans of
million and net deferred loan cost amortization of
thousand for the quarters ended
(2) Includes the average balance of non interest-bearing checking accounts of
and 2022, respectively.
(3) Includes the average balance of uninsured deposits (adjusted lower by
collateralized deposits) of approximately
in the quarters ended
(4) Represents the difference between the weighted-average yield on all
interest-earning assets and the weighted-average rate on all interest-bearing
liabilities.
(5) Represents net interest income before provision (recovery) for loan losses as
a percentage of average interest-earning assets.
44
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Nine Months Ended Nine Months Ended
March 31, 2023 March 31, 2022
Average Yield/ Average Yield/
(Dollars In Thousands) Balance Interest Cost Balance Interest Cost
Interest-earning
assets:
Loans receivable,
net(1) $ 1,011,916 $ 30,365 4.00 % $ 855,080 $ 23,676 3.69 %
Investment securities 175,802 1,632 1.24 % 210,978 1,366 0.86 %
FHLB - San Francisco
stock 8,239 414 6.70 % 8,155 368 6.02 %
Interest-earning
deposits 24,153 666 3.62 % 86,402 105 0.16 %
Total interest-earning
assets 1,220,110 33,077 3.61 % 1,160,615 25,515 2.93 %
Non interest-earning
assets 33,552 32,604
Total assets $ 1,253,662 $ 1,193,219
Interest-bearing
liabilities:
Checking and money
market accounts(2) $ 489,633 $ 177 0.05 % $ 504,282 $ 169 0.04 %
Savings accounts 326,381 130 0.05 % 320,999 128 0.05 %
Time deposits 146,227 1,364 1.24 % 133,872 592 0.59 %
Total deposits(3) 962,241 1,671 0.23 % 959,153 889 0.12 %
Borrowings 143,887 3,655 3.38 % 88,986 1,537 2.30 %
Total interest-bearing
liabilities 1,106,128 5,326 0.64 % 1,048,139 2,426 0.31 %
Non interest-bearing
liabilities 17,147 17,722
Total liabilities 1,123,275 1,065,861
Stockholders' equity 130,387 127,358
Total liabilities and
stockholders' equity $ 1,253,662 $ 1,193,219
Net interest income $ 27,751 $ 23,089
Interest rate
spread(4) 2.97 % 2.62 %
Net interest margin(5) 3.03 %
2.65 %
Ratio of average
interest- earning
assets to average
interest-bearing
liabilities 110.30 % 110.73 %
Return on average
assets 0.72 % 0.74 %
Return on average
equity 6.94 % 6.94 %
(1) Includes the average balance of non-performing loans of
million and net deferred loan cost amortization of
million for the nine months ended
(2) Includes the average balance of non interest-bearing checking accounts of
and 2022, respectively.
(3) Includes the average balance of uninsured deposits (adjusted lower by
collateralized deposits) of approximately
in the nine months ended
(4) Represents the difference between the weighted-average yield on all
interest-earning assets and the weighted-average rate on all interest-bearing
liabilities.
(5) Represents net interest income before provision (recovery) for loan losses as
a percentage of average interest-earning assets.
45
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The following tables set forth the effects of changing rates and volumes on interest income and expense for the quarters and nine months endedMarch 31, 2023 and 2022, respectively. 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. Rate/Volume Variance Quarter Ended March 31, 2023 Compared To Quarter Ended March 31, 2022 Increase (Decrease) Due to (In Thousands) Rate Volume Rate/Volume Net Interest-earning assets: Loans receivable(1)$ 1,397 $ 1,731 $ 319$ 3,447 Investment securities 150 (90) (27) 33 FHLB - San Francisco stock 22 1 - 23 Interest-earning deposits 961 (28) (686) 247 Total net change in income on interest-earning assets 2,530 1,614 (394) 3,750 Interest-bearing liabilities:
Checking and money market accounts 6 (3)
(1) 2
Savings accounts - (1) 1 -
Time deposits 419 55 129 603
Borrowings 337 538 407 1,282
Total net change in expense on
interest-bearing liabilities 762 589 536 1,887
Net increase (decrease) in net interest
income $ 1,768 $ 1,025 (1) For purposes of calculating volume, rate and rate/volume variances,
non-performing loans were included in the weighted-average balance
outstanding.
Nine Months Ended March 31, 2023 Compared
To Nine Months Ended March 31, 2022
Increase (Decrease) Due to
(In Thousands) Rate Volume Rate/Volume Net
Interest-earning assets:
Loans receivable(1) $ 1,984 $ 4,340 $ 365 $ 6,689
Investment securities 593 (227) (100) 266
FHLB - San Francisco stock 42 4 - 46
Interest-bearing deposits 2,251 (75) (1,615) 561
Total net change in income on
interest-earning assets 4,870 4,042 (1,350) 7,562
Interest-bearing liabilities: Checking and money market accounts 13 (4)
(1) 8
Savings accounts - 2 - 2
Time deposits 657 55 60 772
Borrowings 725 948 445 2,118
Total net change in expense on
interest-bearing liabilities 1,395 1,001 504 2,900
Net increase (decrease) in net interest
income $ 3,475 $ 3,041 (1) For purposes of calculating volume, rate and rate/volume variances,
non-performing loans were included in the weighted-average balance
outstanding.
46
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Provision (Recovery) for Loan Losses:
For the Quarters EndedMarch 31, 2023 and 2022. During the third quarter of fiscal 2023, the Corporation recorded a provision for loan losses of$169,000 , compared to a$645,000 recovery from the allowance for loan losses recorded during the same quarter last year. The provision for loan losses primarily reflects an increase in loans held for investment in the third quarter of fiscal 2023. For the Nine Months EndedMarch 31, 2023 and 2022. During the first nine months of fiscal 2023, the Corporation recorded a provision for loan losses of$430,000 , compared to a recovery from the allowance for loan losses of$2.1 million in the same period of fiscal 2022. The provision for loan losses primarily reflects an increase in loans held for investment in the first nine months of fiscal 2023. Non-performing assets, comprised solely of non-performing loans with underlying collateral located inCalifornia , decreased$478,000 or 34 percent to$945,000 , or 0.07 percent of total assets, atMarch 31, 2023 , compared to$1.4 million , or 0.12 percent of total assets, atJune 30, 2022 . Non-performing loans atMarch 31, 2023 were comprised of five single-family loans, while non-performing loans atJune 30, 2022 were comprised of seven single-family loans. At bothMarch 31, 2023 andJune 30, 2022 , there was no real estate owned. Net loan recoveries for the quarter endedMarch 31, 2023 were$2,000 or 0.00 percent (annualized) of average loans receivable, as compared to net loan recoveries of$6,000 or 0.00 percent (annualized) of average loans receivable for the quarter endedMarch 31, 2022 . For the nine months endedMarch 31, 2023 , net loan recoveries were$7,000 or 0.00 percent (annualized) of average loans receivable, as compared to net loan recoveries of$433,000 or 0.07 percent (annualized) of average loans receivable for the nine months endedMarch 31, 2022 . Classified assets were$3.0 million atMarch 31, 2023 , consisting of$1.5 million of loans in the special mention category and$1.5 million of loans in the substandard category; while classified assets atJune 30, 2022 were$1.6 million , consisting of$224,000 of loans in the special mention category and$1.4 million of loans in the substandard category. AtMarch 31, 2023 , the allowance for loan losses was$6.0 million , comprised of collectively evaluated allowances of$6.0 million and individually evaluated allowances of$38,000 ; up eight percent from$5.6 million atJune 30, 2022 . The allowance for loan losses as a percentage of gross loans held for investment was 0.56 percent atMarch 31, 2023 , compared to 0.59 percent atJune 30, 2022 . The allowance for loan losses was determined through quantitative and qualitative adjustments including the Bank's charge-off experience and reflects the impact on loans held for investment from the current general economic conditions of theU.S. andCalifornia economies. Management considers, based on currently available information, the allowance for loan losses sufficient to absorb potential losses inherent in loans held for investment. See "Asset Quality" below and Note 5 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements for additional discussion regarding the allowance for loan losses.
Non-Interest Income:
For the Quarters EndedMarch 31, 2023 and 2022. Non-interest income decreased by$133,000 , or 12 percent, to$981,000 in the third quarter of fiscal 2023 from$1.1 million in the same period last year, primarily due to a decrease in loan servicing and other fees. Loan servicing and other fees decreased$133,000 or 56 percent to$104,000 in the third quarter of fiscal 2023 from$237,000 in the same quarter last year. The decrease was attributable primarily to lower loan prepayment fees resulting from fewer loan payoffs, particularly in multi-family loans. Total loan prepayment fees in the third quarter of fiscal 2023 were$48,000 , down$182,000 or 79 percent from$230,000 in the same quarter last year. Total loan repayments were$17.5 million in the third quarter of fiscal 2023, down 67 percent from$53.6 million in the same quarter last year. For the Nine Months EndedMarch 31, 2023 and 2022. Total non-interest income decreased$611,000 , or 17 percent, to$2.9 million for the nine months endedMarch 31, 2023 from$3.6 million for the same period last year. The decrease was primarily attributable to a decrease in loan servicing and other fees. 47
Table of Contents
Loan servicing and other fees decreased by$540,000 or 62 percent to$327,000 in the first nine months of fiscal 2023 from$867,000 in the same period last year. The decrease was due primarily to a decrease in loan prepayment fees resulting from fewer loan payoffs, particularly in multi-family loans. Total loan prepayment fees in the first nine months of fiscal 2023 was$270,000 , down$556,000 or 67 percent from$826,000 in the same period last year. Total loan repayments were$77.2 million in the first nine months of fiscal 2023, down 57 percent from$180.1 million in the same period last year. Other changes in non-interest income during the first nine months of fiscal 2023 compared to the same period in fiscal 2022, included a$73,000 or six percent decrease in card and processing fees. Non-Interest Expense: For the Quarters EndedMarch 31, 2023 and 2022. Non-interest expenses increased by$25,000 or less than one percent to$6.9 million in the third quarter of fiscal 2023 from the same quarter last year. The increase in the non-interest expense in the third quarter of fiscal 2023 was primarily due to higher salaries and employee benefits expenses and higher deposit insurance premium and regulatory assessment, partly offset by lower equipment, professional and other operating expenses. For the Nine Months EndedMarch 31, 2023 and 2022. Non-interest expense for the nine months endedMarch 31, 2023 was$20.7 million , an increase of$1.2 million , or six percent, compared to$19.5 million in the nine months endedMarch 31, 2022 . The increase was primarily attributable to an increase in salaries and employee benefits expense. Salaries and employee benefits expense increased by$1.1 million , or nine percent, to$12.9 million in the first nine months of fiscal 2023 from$11.8 million in the same period of fiscal 2022. The increase was due primarily to the$1.2 million credit related to ERTC recorded in the first quarter of fiscal 2022 and not replicated in fiscal 2023.
Provision for Income Taxes:
The income tax provision reflects accruals for taxes at the applicable rates for federal income tax andCalifornia 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, earnings from bank-owned life insurance policies, among others. Therefore, there are fluctuations in the effective income tax rate from period to period based on the relationship of net permanent differences to income before tax. For the Quarters EndedMarch 31, 2023 and 2022. The income tax provision was$966,000 for the third quarter of fiscal 2023, up 38 percent from$699,000 in the same quarter last year primarily due to higher pre-tax income. The effective tax rate in the third quarter of fiscal 2023 was 29.4 percent as compared to 29.2 percent in the same quarter last year. For the Nine Months EndedMarch 31, 2023 and 2022. The income tax provision was$2.8 million for the first nine months of fiscal 2023, an eight percent increase from$2.6 million in the same period last year, primarily reflecting higher pre-tax income. The effective income tax rate for the nine months endedMarch 31, 2023 and 2022 was 29.3 percent and 28.1 percent, respectively. The lower effective income tax rate in the first nine months of fiscal 2022 was attributable primarily to the tax benefits from the non-taxable treatment of the ERTC for state income tax purposes. The Corporation believes that the effective income tax rates applied in the first nine months of fiscal 2023 reflect its current income tax obligations.
Asset Quality
Non-performing assets were comprised solely of non-performing loans at bothMarch 31, 2023 andJune 30, 2022 . Non-performing loans, net of the allowance for loan losses, consisting of loans with collateral located inCalifornia , were$945,000 atMarch 31, 2023 , down 34 percent from$1.4 million atJune 30, 2022 . Non-performing loans as a percentage of loans held for investment atMarch 31, 2023 was 0.09%, down from 0.15% atJune 30, 2022 . The non-performing loans atMarch 31, 2023 were comprised of five single-family loans; while the non-performing loans atJune 30, 2022 were comprised of seven single-family loans. No interest accruals were made for loans that were past due 90 days or more or if the loans were deemed non-performing. There was no real estate owned at eitherMarch 31, 2023 orJune 30, 2022 . 48
Table of Contents
As ofMarch 31, 2023 , total restructured loans were$1.4 million , down 69 percent from$4.5 million atJune 30, 2022 . AtMarch 31, 2023 , a total of$710,000 or 52 percent of these restructured loans were classified as non-performing; while atJune 30, 2022 , a total of$722,000 or 16 percent of these restructured loans were classified as non-performing. As ofMarch 31, 2023 , a total of$966,000 or 71 percent of the restructured loans had a current payment status, consistent with their modified payment terms. As ofJune 30, 2022 , all of the restructured loans had a current payment status, consistent with their modified payment terms. Restructured loans which are performing in accordance with their modified terms and not otherwise classified as non-accrual are not included in non-performing assets. For further analysis on non-performing loans and restructured loans, see Note 5 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements of this Form 10-Q. A decline in real estate values subsequent to the time of origination of the Corporation's real estate secured loans could result in higher loan delinquency levels, foreclosures, provision for loan losses and net charge-offs. Real estate values and real estate markets are beyond the Corporation'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, changes in tax laws and other governmental statutes, regulations and policies and acts of nature, such as earthquakes, fires and national disasters particular toCalifornia where substantially all of the Corporation's real estate collateral is located. If real estate values decline, the value of the real estate collateral securing the Corporation's loans as set forth in the table could be significantly overstated. The Corporation's 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. The Corporation generally does not update the loan-to-value ratio on its loans held for investment by obtaining new appraisals or broker price opinions (nor does the Corporation intend to do so in the future as a result of the costs and inefficiencies associated with completing the task) unless a specific loan has demonstrated deterioration in which case individually evaluated allowances are established, if required. The following table sets forth information with respect to the Corporation's non-performing assets, net of allowance for loan losses, at the dates indicated: At March 31, At June 30, (In Thousands) 2023 2022 Loans on non-accrual status (excluding restructured loans): Mortgage loans: Single-family $ 235 $ 701 Total 235 701
Accruing loans past due 90 days or more - - Restructured loans on non-accrual status: Mortgage loans: Single-family 710 722 Total 710 722 Total non-performing loans 945 1,423 Real estate owned, net - - Total non-performing assets $ 945$ 1,423
Non-performing loans as a percentage of loans held for investment, net of allowance for loan losses
0.09 % 0.15 %
Non-performing loans as a percentage of total assets 0.07 % 0.12 %
Non-performing assets as a percentage of total assets 0.07
% 0.12 %
49
Table of Contents
The following table summarizes classified assets, which is comprised of classified loans, net of allowance for loan losses and fair value adjustments, and real estate owned, if any, at the dates indicated:
At March 31, 2023 At June 30, 2022
(Dollars In Thousands) Balance Count Balance Count
Special mention loans:
Mortgage loans:
Single-family $ 1,017 3 $ 224 1
Multi-family 511 1 - -Total special mention loans 1,528 4
224 1 Substandard loans: Mortgage loans: Single-family 945 5 1,423 9 Commercial real estate 550 1 - - Total substandard loans 1,495 6 1,423 9 Total classified loans 3,023 10 1,647 10 Real estate owned - - - - Total classified assets$ 3,023 10$ 1,647 10 Total classified assets as a percentage of total assets 0.23 % 0.14 % 50 Table of Contents Loan Volume Activities The following table is provided to disclose details related to the volume of loans originated, purchased and sold for the quarters and nine months indicated: For the Quarter Ended For the Nine Months Ended March 31, March 31, (In Thousands) 2023 2022 2023 2022 Loans originated for sale: Wholesale originations $ - $ -$ 512 $ -
Total loans originated for sale - -
512 -
Loans sold:
Servicing retained - - (512) -
Total loans sold - - (512) -
Loans originated for investment:
Mortgage loans:
Single-family 39,543 48,624 153,671 128,764
Multi-family 10,660 31,487 43,519 71,725
Commercial real estate 3,422 7,011 13,772 11,216
Construction 260 544 1,648 2,228
Commercial business loans - - 190 -Total loans originated for investment 53,885 87,666
212,800 213,933
Loans purchased for investment Mortgage loans: Single-family - 6,354 - 6,354 Total loans purchased for investment - 6,354 - 6,354 Mortgage loan principal payments (17,458) (53,647) (77,184) (180,053) Increase in other items, net?¹? 940 1,184 2,096 2,369
Net increase in loans held for investment
137,712
(1) Includes net changes in undisbursed loan funds, deferred loan fees or costs,
allowance for loan losses, fair value of loans held for investment and
advance payments of escrows.
Liquidity and Capital Resources
The Corporation's primary sources of funds are deposits, proceeds from principal and interest payments on loans and investment securities, proceeds from the maturity of loans and investment securities, FHLB -San Francisco advances, access to the discount window facility at theFederal Reserve Bank of San Francisco and access to a federal funds facility with its correspondent bank. 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 Corporation is the origination and purchase of loans held for investment. During the first nine months of fiscal 2023 and 2022, the Corporation originated and purchased loans held for investment of$212.8 million and$220.3 million , respectively. AtMarch 31, 2023 , the Corporation had loan origination commitments totaling$8.9 million , undisbursed lines of credit totaling$914,000 and undisbursed construction loan funds totaling$2.9 million . The Corporation anticipates that it will have sufficient funds available to meet its current loan commitments. During the first nine months of fiscal 2023 and 2022, total loan repayments were$77.2 million and$180.1 million , respectively. 51
Table of Contents
The Corporation's primary financing activity is gathering deposits and, when needed, borrowings, principally FHLB -San Francisco advances. During the first nine months of fiscal 2023, the net increase in deposits was$27.5 million or three percent, due primarily to an increase in time deposits (attributable to brokered certificates of deposit), partly offset by a decrease in transaction accounts. Transaction account balances decreased$57.4 million , or seven percent, to$777.0 million atMarch 31, 2023 from$834.4 million atJune 30, 2022 and time deposits increased$85.0 million , or 70 percent, to$206.1 million atMarch 31, 2023 from$121.1 million atJune 30, 2022 . The increase in time deposits was due to a$95.3 million increase in brokered certificates of deposit with a weighted average cost of 4.37 percent (including broker fees). Brokered certificates of deposit totaled$95.3 million atMarch 31, 2023 . AtMarch 31, 2023 , time deposits with a principal amount of$250,000 or less and scheduled to mature in one year or less were$148.3 million and total time deposits with a principal amount of more than$250,000 and scheduled to mature in one year or less were$16.0 million . Historically, the Corporation has been able to retain a significant percentage of its time deposits as they mature. The Corporation 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 Corporation maintains sufficient cash and cash equivalents to meet short-term liquidity needs. AtMarch 31, 2023 , total cash and cash equivalents were$60.8 million , or five percent of total assets. Depending on market conditions and the pricing of deposit products and the FHLB -San Francisco advances, the Bank may rely on FHLB -San Francisco advances for part of its liquidity needs. As ofMarch 31, 2023 , total borrowings were$205.0 million and the financing availability at the FHLB -San Francisco was limited to 35 percent of total assets. As a result, the remaining borrowing capacity available was$228.6 million and the remaining available collateral was$420.7 million . In addition, the Bank has secured a$135.8 million discount window facility at theFederal Reserve Bank of San Francisco , collateralized by investment securities with a fair market value of$93.3 million and investment securities with par value of$53.5 million . As ofMarch 31, 2023 , the Bank also has a borrowing arrangement in the form of a federal funds facility with its correspondent bank for$50.0 million . The Bank had no advances under its discount window or correspondent bank facility as ofMarch 31, 2023 . The Bank continues to work with both the FHLB -San Francisco andFederal Reserve Bank of San Francisco to ensure that borrowing capacity is continuously reviewed and updated in order to be accessed seamlessly should the need arise. This includes establishing accounts and pledging assets as needed in order to maximize borrowing capacity and liquidity. Regulations require thrifts 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 endedMarch 31, 2023 decreased to 18.1 percent from 24.3 percent for the quarter endedJune 30, 2022 . During the first nine months of fiscal 2023, the Corporation purchased 251,221 shares of the Corporation's common stock under theApril 2022 stock repurchase plan with a weighted average cost of$14.30 per share. As ofMarch 31, 2023 , there are 113,038 shares available for purchase until the plan expires onApril 28, 2023 . Subsequent toMarch 31, 2023 , the Board of Directors extended theApril 2022 stock repurchase plan for a period of one year or until completed, whichever occurs first. The Corporation purchases the shares from time to time in the open market or through privately negotiated transactions depending on market conditions, the capital requirements of the Corporation, and available cash that can be allocated to the stock repurchase program, among other considerations.Provident Financial Holdings is a separate legal entity from the Bank and, on a stand-alone level, must provide for its own liquidity and pay its own operating expenses and cash dividends.Provident Financial Holdings's primary sources of funds consist of capital raised through dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. We currently expect to continue our current practice of paying quarterly cash dividends on our common stock subject to our Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is$0.14 per share, as approved by our Board of Directors, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank, and returning a portion of our cash to our shareholders. Assuming continued payment during 2023 at this rate of$0.14 per share, our average total dividend paid each quarter would be approximately$1.0 million based on the number of outstanding shares atMarch 31, 2023 . AtMarch 31, 2023 , the Corporation (on an unconsolidated basis) had liquid assets of
$6.0 million . 52 Table of Contents 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. AtMarch 31, 2023 , the Bank exceeded all regulatory capital requirements. The Bank was categorized "well-capitalized" atMarch 31, 2023 under the regulations of the OCC. As a bank holding company registered with theFederal Reserve ,Provident Financial Holdings, Inc. is subject to the capital adequacy requirements of theFederal Reserve . For a bank holding company with less than$3.0 billion in assets, the capital guidelines apply on a bank only basis, and theFederal Reserve expects the holding company's subsidiary bank to be well capitalized under the prompt corrective action regulations.
The Bank's actual and required minimum capital amounts and ratios at the dates indicated are as follows (dollars in thousands):
Regulatory Requirements
Minimum for Capital Minimum to Be
Actual AdequacyPurposes(1) Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
Provident Savings Bank , F.S.B.: As ofMarch 31, 2023 Tier 1 leverage capital (to adjusted average assets)$ 123,456 9.59 %$ 51,493 4.00 %$ 64,366 5.00 % CET1 capital (to risk-weighted assets)$ 123,456 17.90 %$ 48,279 7.00 %$ 44,831 6.50 % Tier 1 capital (to risk-weighted assets)$ 123,456 17.90 %$ 58,625 8.50 %$ 55,176 8.00 % Total capital (to risk-weighted assets)$ 129,530 18.78 %$ 72,419 10.50 %$ 68,970 10.00 % As of June 30, 2022 Tier 1 leverage capital (to adjusted average assets)$ 124,871 10.47 %$ 47,699 4.00 %$ 59,624 5.00 % CET1 capital (to risk-weighted assets)$ 124,871 19.58 %$ 44,653 7.00 %$ 41,463 6.50 % Tier 1 capital (to risk-weighted assets)$ 124,871 19.58 %$ 54,221 8.50 %$ 51,032 8.00 % Total capital (to risk-weighted assets)$ 130,565 20.47 %$ 66,979 10.50 %$ 63,790 10.00 %
(1) Inclusive of the conservation buffer of not less than 2.50% for Common Equity
Tier 1 ("CET1") capital, Tier 1 capital and Total capital ratios.
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
greater than 2.5% of risk-weighted assets 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.
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.
The Bank may not declare or pay a cash dividend if the effect thereof would
cause its net worth to be reduced below the regulatory capital requirements
imposed by federal regulation.
53
Table of Contents
Supplemental Information
At At At
March 31, June 30, March 31,
2023 2022 2022
Loans serviced for others (in thousands)
Book value per share$ 18.40 $ 17.66 $
17.43
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