PROVIDENT FINANCIAL: Discussion and analysis of the financial situation and the operating result by the management (Form 10-K)
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 50
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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 Delawarecorporation, was organized in January 1996for 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 millionand 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 Systemsince 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 Riversideand San Bernardinocounties in California. Loans are primarily originated and purchased in Southern and Northern Californiato be held for investment. There are various risks inherent in the Corporation's business including, among others, the general business environment, interest rates, the Californiareal 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 51
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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 restructuring in difficulty (“restructured loan”) is a loan where the company grants the borrower a concession based on the borrower’s financial difficulties that the company would not otherwise consider.
Loan terms that have been changed or restructured due to a borrower’s financial difficulties 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 52 Table of Contents
Features to be improved such as: among other things satisfactory cash flow, satisfactory guarantee support and additional collateral support.
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.
Summary and operational 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 Bankand 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.
In the next three years, depending on market conditions, the company intends to improve its community banking business through a moderate increase in total assets (by increasing single-family, multi-family, commercial real estate, construction and commercial loans). In addition, the company intends to reduce the time share
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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 Corpperforms 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 Californiaeconomic 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 Californiareal 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."
Impact of COVID-19 on the company
The Corporation is actively monitoring and responding to the effects of the rapidly-changing COVID-19 pandemic.
The Centers of Disease Controland 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 CDCguidelines 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 $897,000or 0.11 percent of total loans and one commercial real estate loan with an outstanding balance of $945,000or 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. 54 Table of Contents
The company believes that the COVID-19 pandemic could affect business in one or more of the following ways in future time frames:
For certain commercial real estate loans, higher provisions may apply,
? especially to borrowers with tenants in industries such as the hospitality industry,
Travel, hospitality and restaurants and bars as well as businesses that
Significantly lower market rates that negatively affect
floating rate loans, indexed to LIBOR, SOFR,
? on deposit pricing, as interest rate adjustments usually have the effect
the return that is earned on interest-bearing assets because the interest on many deposits
Accounts are decision-based, and are not tied to any particular market-based index
based on competition for deposits;
Noninterest income may decrease due to a decrease in fees earned as expenses
? Habits are changing due to debit card customers complying with COVID-19 authorities
Safety requirements and which can otherwise be impaired by cuts
in their personal income or job loss;
? Non-interest expenses related to the effects of the COVID-19 pandemic can
increase, including cleaning costs, consumables, equipment and other items; and
Further loan modifications can occur and borrowers can default on their loans
? Loans that may require a further increase in loan loss provisions
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, 2021and 2020, these commitments were $21.9 millionand $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. 55 Table of Contents
Comparison of the financial position at
Total assets increased
$6.8 million, or 1%, to $1.18 billionat June 30, 2021from 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 millionat June 30, 2021from $116.0 millionat 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, 2021was 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 millionat June 30, 2021from $123.3 millionat 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 millionat June 30, 2021from $902.8 millionat June 30, 2020. In fiscal 2021, the Corporation originated $215.0 millionof 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 millionof loans to be held for investment (primarily single-family and multi-family loans) in fiscal 2021, down 88% from $142.1 millionof 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 millionin 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 millionat June 30, 2021from $605.4 millionat 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 millionat June 30, 2021, from $298.8 millionat 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 millionat June 30, 2021from $893.0 millionat June 30, 2020. Transaction accounts increased $74.5 million, or 10%, to $797.5 millionat June 30, 2021from $723.0 millionat June 30, 2020; while time deposits decreased $29.6 million, or 17%, to $140.4 millionat June 30, 2021from $170.0 millionat June 30, 2020. As of June 30, 2021and 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, 2021from 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 Franciscoadvances decreased $40.0 million, or 28%, to $101.0 millionat June 30, 2021from $141.0 millionat 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 Franciscoadvances 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 millionor 3% to $127.3 millionat June 30, 2021from $124.0 millionat 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 Securitiesand Use of Proceeds" of this Form 10-K) and quarterly cash dividends paid to shareholders. 56 Table of Contents
Comparison of the operating results of the past years
General. The Corporation recorded net income of
$7.6 million, or $1.00per diluted share, for the fiscal year ended June 30, 2021, down $128,000, or 2%, from $7.7 million, or $1.01per 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 milliondecrease in net interest income, partly offset by a $3.2 milliondecrease in non-interest expense and a $1.8 millionimprovement in the provision for loan losses resulting in a recovery of $708,000from 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 millionin fiscal 2021 from $36.4 millionin 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 billionin fiscal 2021 from $1.08 billionin fiscal 2020. The average balance of interest-bearing liabilities increased $67.9 millionor 7% to $1.04 billionduring fiscal 2021 as compared to $972.0 millionduring fiscal 2020. Interest Income. Total interest income decreased $7.3 million, or 17%, to $35.2 millionfor fiscal 2021 from $42.5 millionfor 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 millionin fiscal 2021 from $39.1 millionin 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 millionduring fiscal 2021 from $915.4 millionduring fiscal 2020. Interest income from investment securities decreased $271,000, or 13%, to $1.8 millionin fiscal 2021 from $2.1 millionin 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 millionin fiscal 2021 from $86.8 millionin 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 millionof mortgage-backed securities with a weighted average yield of 0.82% and did not sell any investment securities. During fiscal 2021, the Bank received $418,000of cash dividends from its FHLB - San Franciscostock, a decrease of $116,000or 22% from the $534,000of 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 $78,000in fiscal 2021 from $657,000in 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 millionin fiscal 2021 from $71.8 millionin fiscal 2020. Interest Expense. Total interest expense for fiscal 2021 was $4.6 millionas compared to $6.1 millionfor fiscal 2020, a decrease of $1.5 million, or 25%. This decrease was primarily attributable to a lower interest expense on deposits, 57 Table of Contents 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 millionas compared to $2.9 millionfor 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 millionduring fiscal 2021 from $844.1 millionduring fiscal 2020. The average balance of transaction accounts increased $102.2 million, or 16%, to $760.0 millionin fiscal 2021 from $657.8 millionin fiscal 2020. The average balance of time deposits decreased by $31.9 million, or 17%, to $154.4 millionin fiscal 2021 from $186.3 millionin 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 Franciscoadvances, for fiscal 2021 decreased $295,000, or 9%, to $2.8 millionas compared to $3.1 millionin 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 millionin advances with total prepayment fees of $33,000. The average balance of borrowings decreased $2.3 million, or 2%, to $125.6 millionduring fiscal 2021 from $127.9 millionduring 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 millionprovision 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 millionat June 30, 2021from $8.3 millionat 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 millionor 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, 2021were $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, 2021and 2020. As of June 30, 2021, 89%, or $7.7 millionof non-performing loans have a current payment status. Net loan recoveries in fiscal 2021 were $30,000or 0.00% of average loans receivable, compared to net loan recoveries of $70,000or 0.01% of average loans receivable in fiscal 2020. Classified assets at June 30, 2021were $10.4 million, comprised of $1.8 millionin the special mention category, $8.6 millionin the substandard category and no outstanding REO. Classified assets at June 30, 2020were $14.1 million, comprised of $8.6 millionin the special mention category, $5.5 millionin 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 58 Table of Contents were converted to real estate owned. The outstanding balance of restructured loans at June 30, 2021was $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 millionof 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 millionat 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, 2021includes $384,000of individually evaluated allowances, compared to $100,000of 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 millionin fiscal 2021 from $4.5 millionin 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 millionfor fiscal 2021 from $819,000in 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
Deposit account fees decreased
$363,000, or 23%, to $1.2 millionfor fiscal 2021 from $1.6 millionin 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 millionin 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 millionin fiscal 2021 from $18.9 millionin fiscal 2020. The decrease in salaries and employee benefits was primarily due to a $2.4 millioncredit 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 $10,000of qualified wages paid to an employee per calendar quarter for the year 2021.
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Deposit insurance premiums and expenses for government reports increased
The increase was mainly due to
Provision for Income Taxes. The income tax provision reflects accruals for taxes at the applicable rates for federal income tax and
Californiafranchise 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 Californiatax-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 millionfor fiscal 2021, representing an effective tax rate of 25.8%, as compared to $3.2 millionin 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. 60 Table of Contents
Average balances, interest and average income / 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 Franciscostock 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 $ 1,130,666Interest-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 $ 1,130,666Net 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 millionand $1.2 millionfor 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 millionand $84.1 millionin 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. 61 Table of Contents 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
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
(1) Includes non-performing loans. To calculate volume, rate and rate / volume variances, non-performing loans were included in the weighted average outstanding balance.
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. To calculate volume, rate and rate / volume variances, non-performing loans were included in the weighted average outstanding balance.
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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 Franciscoadvances, 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, 2021and 2020, the Bank originated loans held for investment of $215.0 millionand $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 millionand $142.1 million, respectively. At June 30, 2021and 2020, the Bank had loan origination commitments totaling $21.9 millionand $13.6 million, respectively, with undisbursed loan funds of $4.5 millionand $4.0 million, respectively.
The bank expects that it will have sufficient funds to meet its current lending obligations.
The Bank's primary financing activity is gathering deposits. During the fiscal years ended
June 30, 2021and 2020, the net increase in deposits was $45.0 millionand $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 Franciscoadvances, the Bank may continue to rely on FHLB - San Franciscoadvances for part of its liquidity needs. As of June 30, 2021, the remaining financing availability at FHLB - San Franciscowas $296.8 millionand the remaining available collateral was $343.1 million. In addition, the Bank has secured a $206.1 milliondiscount 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 millionwhich 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, 2021increased 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, 2021in 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 Franciscoand 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 billionin assets, the capital guidelines apply on a bank only basis, and the Federal Reserveexpects 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 63
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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.
Effects of inflation and price changes
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.
Effects of New Accounting Admissions
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.
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