Provident Financial Holdings Inc: Form 10-Q for the period ended Mar 31, 2024

General

Provident Financial Holdings, Inc., a Delaware corporation, was organized in January 1996 for the purpose of becoming the holding company of Provident Savings Bank, F.S.B. (the “Bank") upon the Bank’s conversion from a federal mutual to a federal stock savings bank (“Conversion”). The Conversion was completed on June 27, 1996. The Corporation is regulated by the Board of Governors of the Federal Reserve System (“Federal Reserve”). At March 31, 2024, the Corporation had total assets of $1.29 billion, total deposits of $908.1 million and total stockholders’ equity of $129.5 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 to Provident 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 in Riverside, California. The Bank is regulated by the Office of the Comptroller of the Currency (“OCC”), its primary federal regulator, and the Federal Deposit Insurance Corporation (“FDIC”), the insurer of its deposits. The Bank’s deposits are federally insured up to applicable limits by the FDIC. The Bank has been a member of the FHLB System since 1956.

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

The Corporation began paying quarterly cash dividends during the quarter ended September 30, 2002. On January 25, 2024, 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 on February 15, 2024, which was paid on March 7, 2024. Future declarations or payments of dividends will be subject to the consideration of the Corporation’s Board of Directors, which will consider the Corporation’s financial condition, results of operations, tax considerations, capital requirements, industry standards, legal restrictions, economic conditions and other factors, including the regulatory restrictions which affect the payment of dividends by the Bank to the Corporation. Under Delaware law, dividends may be paid either out of surplus or, if there is no surplus, out of net profits for the current fiscal year and/or the preceding fiscal year in which the dividend is declared.

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

This Form 10-Q contains statements that the Corporation believes are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to the Corporation’s financial condition, liquidity, results of operations, plans, objectives, future performance or business. You should not place undue reliance on these statements as they are subject to various risks and uncertainties. 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 from the results anticipated or implied by our forward-looking statements include, but are not limited to: potential adverse impacts to economic conditions in our local market areas, other markets where the Corporation has lending relationships, or other aspects of the Corporation's business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages, a potential recession or slowed economic growth; changes in the interest rate environment, including the past increases in the Board of Governors of the Federal Reserve benchmark rate and duration at which such increased interest rate levels are maintained, which could adversely affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital and liquidity; the impact of continuing elevated inflation levels and the current and future monetary policies of the Federal Reserve in response thereto; the effects of any federal government shutdown; increased competitive pressures; changes in conditions within the securities markets; fluctuations in deposits; liquidity issues, including our ability to borrow funds or raise additional capital, if necessary; the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment; our ability to attract and retain deposits; our ability to pay dividends on our common stock; legislative and regulatory changes, including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules; 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; 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; and other factors described in the Corporation’s latest Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other reports filed with and furnished to the Securities and Exchange Commission (“SEC”) which are available on our website at www.myprovident.com (http://www.myprovident.com) and on the SEC’s website at www.sec.gov (http://www.sec.gov). We do not undertake and specifically disclaim any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements whether as a result of new information, future events or otherwise. These risks could cause our actual results for fiscal 2024 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of us and could negatively affect our operating and stock price performance.

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 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 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 Critical Accounting Estimates 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 of the Notes to Consolidated Financial Statement of our 2023 Annual

Form 10-K. The Corporation adopted the current expected credit loss, or CECL, methodology on July 1, 2023. Accounting for the allowance for credit losses (“ACL”) involves significant judgement and assumptions by management and is based on historical data, current economic conditions and a reasonable and supportable forecast of future events. On a quarterly basis, management reviews the methodology and adequacy of the ACL. Refer to Notes 2, 4 and 5 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements, and the “Provision for (Recovery of) Credit Losses” section in this Form 10-Q for more information on the establishment of the ACL and the implementation of CECL.

Executive Summary and Operating Strategy

Provident Savings Bank, F.S.B., established in 1956, is a financial services company committed to serving consumers and small to mid-sized businesses in the Inland Empire region of Southern California. The Bank conducts its business operations as Provident Bank and through its subsidiary, Provident Financial Corp. The business activities of the Corporation, primarily through the Bank, consist of community banking and, to a lesser degree, investment services for customers and trustee services on behalf of the Bank.

Community banking operations primarily consist of accepting deposits from customers within the communities surrounding the Corporation’s full service offices and investing those funds in single-family, multi-family and commercial real estate loans. Also, to a lesser extent, the Corporation makes construction, commercial business, consumer and other mortgage loans. The primary source of income in community banking is net interest income, which is the difference between the interest income earned on loans and investment securities, and the interest expense paid on interest-bearing deposits and borrowed funds. Additionally, certain fees are collected from depositors, such as returned check fees, deposit account service charges, ATM fees, IRA/KEOGH fees, safe deposit box fees, wire transfer fees and overdraft protection fees, among others.

The Corporation, subject to market conditions, intends to improve its community banking business over the next several years by moderately increasing total assets by increasing single-family, multi-family, commercial real estate, construction and commercial business loans. Further, the Corporation intends to gradually decrease the percentage of time deposits in its deposit base and to increase the percentage of lower cost checking and savings accounts, although deposit account diversification will also remain a focus. 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 uncertainty of current general economic conditions, the high interest rate environment and the inverted yield curve.

Investment services operations primarily consist of selling alternative investment products such as annuities and mutual funds to the Bank’s depositors. 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. Investment services and trustee services contribute a very small percentage of gross revenue.

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 2023 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. The California economic environment presents heightened risk for the Corporation primarily with respect to real estate values and loan delinquencies. Since the majority of the Corporation’s loans are secured by real estate located within California, significant declines in the value of California real estate may also inhibit the Corporation’s ability to recover on defaulted loans by selling the underlying real estate. The commercial real estate environment, particularly office space of various types, currently presents elevated risk within the banking industry. In response, the Bank has reviewed its existing office space exposure for any outsized exposure and implemented tighter underwriting standards for this collateral type. At March 31, 2024, our commercial real estate portfolio totaled $83.1 million, including office space of various types, totaling approximately $41.8 million or 50.3 percent of the total commercial real estate portfolio and 3.9 percent of the total loan portfolio.

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 March 31, 2024 and June 30, 2023

Total assets decreased three percent to $1.29 billion at March 31, 2024 from $1.33 billion at June 30, 2023. The decrease was primarily attributable to decreases in cash and cash equivalents, investment securities and loans held for investment.

Total cash and cash equivalents, primarily excess cash deposited with the FRB of San Francisco, decreased $14.1 million, or 21 percent, to $51.7 million at March 31, 2024 from $65.8 million at June 30, 2023. The decrease in total cash and cash equivalents was primarily attributable to deposit outflows and management’s proactive strategy to manage liquidity based upon recent economic conditions.

Investment securities (held to maturity and available for sale) decreased $18.6 million, or 12 percent, to $137.9 million at March 31, 2024 from $156.5 million at June 30, 2023. 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 2024. 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 decreased $11.9 million, or one percent, to $1.07 billion at March 31, 2024 from $1.08 billion at June 30, 2023, predominantly due to declines in multi-family and commercial real estate loans. During the first nine months of fiscal 2024, the Corporation originated $56.9 million of loans held for investment, consisting primarily of single-family, multi-family and commercial real estate loans located throughout California. The Corporation did not purchase any loans from other institutions during the first nine months of fiscal 2024. Total loan principal payments during the first nine months of fiscal 2024 were $69.3 million, down 10 percent from $77.2 million during the comparable period in fiscal 2023. Single-family loans held for investment at March 31, 2024 and June 30, 2023 totaled $517.0 million and $518.8 million, representing approximately 49 percent and 48 percent of loans held for investment, respectively. Multi-family loans held for investment at March 31, 2024 and June 30, 2023 totaled $457.4 million and $461.1 million, respectively, representing approximately 43 percent of loans held for investment at both dates. Commercial real estate loans held for investment at March 31, 2024 and June 30, 2023 totaled $83.1 million and $90.6 million, respectively, representing approximately eight percent of loans held for investment at both dates.

The tables below describe the geographic dispersion of gross real estate secured loans held for investment at March 31, 2024 and June 30, 2023, as a percentage of the total dollar amount of loans outstanding:

As of March 31, 2024:

(1) Other than the Inland Empire.

As of June 30, 2023:

(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 decreased $42.5 million, or four percent, to $908.1 million at March 31, 2024 from $950.6 million at June 30, 2023, primarily due to a decrease in transaction accounts, partly offset by an increase in time deposits. The decrease in total deposits was primarily due to customers seeking higher interest rates elsewhere. Total uninsured deposits were approximately $136.4 million and $140.1 million at March 31, 2024 and June 30, 2023, respectively. The amounts of uninsured deposits are based on estimated amounts of uninsured deposits as of the reported period. Such estimates are based on the same methodologies and assumptions used for regulatory reporting requirements.

Transaction account balances or “core deposits” decreased $87.4 million, or 12 percent, to $642.2 million at March 31, 2024 from $729.6 million at June 30, 2023, while time deposits increased $45.0 million, or 20 percent, to $265.9 million at March 31, 2024 from $220.9 million at June 30, 2023. The increase in time deposits was due to both increases in retail time deposits and brokered certificates of deposit. Excluding brokered certificates of deposit, the percentage of time deposits to total deposits was 17 percent at March 31, 2024, compared to 14 percent at June 30, 2023. At March 31, 2024 and June 30, 2023, total brokered certificates of deposit were $130.9 million and $106.4 million, respectively.

Total borrowings were virtually unchanged at $235.0 million at March 31, 2024 and June 30, 2023. At March 31, 2024 and June 30, 2023, borrowings were comprised of short-term and long-term FHLB - San Francisco advances used for liquidity and interest rate risk management purposes.

Total stockholders’ equity declined to $129.5 million at March 31, 2024 from $129.7 million at June 30, 2023. Net income of $5.4 million in the first nine months of fiscal 2024 was mostly offset by $2.9 million of cash dividends paid to shareholders, $2.0 million of stock repurchases and the $824,000 impact of the CECL adoption. The Corporation repurchased 148,873 shares of its common stock at a weighted average cost of $13.06 per share during the first nine months of fiscal 2024.

Comparison of Operating Results for the Quarters and Nine Months Ended March 31, 2024 and 2023

Net income for the third quarter of fiscal 2024 was $1.5 million, down $828,000 or 36 percent from $2.3 million in the same period of fiscal 2023. The decrease in net income was primarily attributable to a $842,000 decrease in net interest income, a $244,000 increase in non-interest expense and a $133,000 decrease in non-interest income.

For the first nine months of fiscal 2024, net income was $5.4 million, down $1.4 million. or 20 percent from $6.8 million in the same period of fiscal 2023. The decrease in net income was attributable to a $1.3 million decrease in net interest income, a $705,000 increase in non-interest expense and a $466,000 decrease in non-interest income, partly offset by a $481,000 change in the provision for credit losses to a $51,000 recovery of credit losses in the first nine months of fiscal 2024, in contrast to a $430,000 provision for credit losses in the same period in fiscal 2023.

The efficiency ratio, defined as non-interest expense divided by the sum of net interest income and non-interest income, was 76.20 percent for the third quarter of fiscal 2024, compared to 66.69 percent in the same period last year. For the first nine months of fiscal 2024, the efficiency ratio was 73.82 percent, compared to 67.33 percent for the same period of fiscal 2023. The deterioration of the efficiency ratio during the current quarter and nine-month period compared to the same periods last year was due both to higher non-interest expenses and lower total revenues.

Return on average assets was 0.47 percent in the third quarter of fiscal 2024, down 25 basis points from 0.72 percent in the same period last year. For the first nine months of fiscal 2024, return on average assets was 0.56 percent, down 16 basis points from 0.72 percent in the same period last year.

Return on average stockholders’ equity was 4.57 percent in the third quarter of fiscal 2024, down from 7.12 percent in the same period last year. For the first nine months of fiscal 2024, return on average stockholders’ equity was 5.51 percent, down from 6.94 percent in the same period last year.

Diluted earnings per share for the third quarter of fiscal 2024 were $0.22, down 33 percent from $0.33 in the same period last year. For the first nine months of fiscal 2024, diluted earnings per share were $0.77, down 18 percent from $0.94 in the same period last year.

Net Interest Income:

For the Quarters Ended March 31, 2024 and 2023. Net interest income decreased $842,000 or nine percent to $8.6 million for the third quarter of fiscal 2024 from $9.4 million for the same quarter last year. The decrease in net interest income was due to a lower net interest margin and, to a lesser extent, a lower average balance of interest-earning assets. The lower net interest margin was due to the increase in the average cost of interest-bearing liabilities which exceeded the increase in the average yield on interest-earning assets. The net interest margin during the third quarter of fiscal 2024 decreased 26 basis points to 2.74 percent from 3.00 percent in the same quarter last year. The average yield on interest-earning assets increased 58 basis points to 4.41 percent in the third quarter of fiscal 2024 from 3.83 percent in the same quarter last year, while the average cost of interest-bearing liabilities increased 93 basis points to 1.86 percent in the third quarter of fiscal 2024 from 0.93 percent in the same quarter last year. The average balance of interest-earning assets decreased slightly to $1.25 billion in the third quarter of fiscal 2024 as compared to the same quarter last year. The slight decrease in interest-earning assets was primarily due to a decrease in the average balance of investment securities, partly offset by increases in the average balance of loans receivable and interest-earning deposits. The average balance of interest-bearing liabilities decreased $4.1 million, or one percent, to $1.13 billion in the third quarter of fiscal 2024 from $1.14 billion in the same quarter last year primarily reflecting decreases in the average balance of core deposits or transaction accounts, partly offset by increases in the average balance of borrowings and time deposits.

For the Nine Months Ended March 31, 2024 and 2023. Net interest income decreased $1.3 million or five percent to $26.5 million for the first nine months of fiscal 2024 from $27.8 million in the same period in fiscal 2023, as a result of a lower net interest margin, partly offset by a higher average balance of interest-earning assets. The net interest margin was 2.80 percent in the first nine months of fiscal 2024, a decrease of 23 basis points from 3.03 percent in the same period of fiscal 2023, primarily due to the increase in the average cost of interest-bearing liabilities which exceeded the increase in the average yield on interest-earning assets. The weighted-average cost of interest-bearing liabilities increased by 103 basis points to 1.67 percent for the first nine months of fiscal 2024 as compared to 0.64 percent in the same period last year, while the weighted-average yield on interest-earning assets increased by 70 basis points to 4.31 percent in the first nine months of fiscal 2024 from 3.61 percent in the same period last year. The average balance of interest-earning assets increased $41.1 million, or three percent, to $1.26 billion in the first nine months of fiscal 2024 from $1.22 billion in the comparable period of fiscal 2023, primarily reflecting increases in the average balance of loans receivable and interest-earning deposits, partly offset by a decrease in the average balance of investment securities. The average balance of interest-bearing liabilities increased by $38.0 million, or three percent, to $1.14 billion in the first nine months of fiscal 2024 from $1.11 billion in the same period last year primarily reflecting increases in the average balance of borrowings and time deposits, partly offset by the decrease in average balance of transaction accounts.

Interest Income:

For the Quarters Ended March 31, 2024 and 2023. Total interest income increased $1.8 million, or 15 percent, to $13.8 million for the third quarter of fiscal 2024 from $12.0 million for the same quarter of fiscal 2023. The increase was due primarily to an increase in interest income from loans receivable.

Interest income on loans receivable increased $1.7 million, or 15 percent, to $12.7 million in the third quarter of fiscal 2024 from $11.0 million in the same quarter of fiscal 2023. The increase was due to a higher average yield and, to a lesser extent, a higher average balance. The average yield on loans receivable increased 56 basis points to 4.74 percent in the third quarter of fiscal 2024 from an average yield of 4.18 percent in the same quarter last year. The higher weighted average loan yield was due primarily to the upward repricing of adjustable rate loans and new loan originations with higher weighted average interest rates. Adjustable-rate loans of approximately $112.9 million were repriced upward in the third quarter of fiscal 2024 by approximately 97 basis points from an average yield of 6.72 percent to 7.69 percent. The average balance of loans receivable increased $16.6 million, or two percent, to $1.07 billion in the third quarter of fiscal 2024 from $1.05 billion in the same quarter last year. Net deferred loan cost amortization in the third quarter of fiscal 2024 increased 12 percent to $255,000 from $228,000 in the same quarter last year. Total loans originated for investment in the third quarter of fiscal 2024 were $18.2 million, down 66 percent from $53.9 million in the same quarter last year; while loan principal payments received in the third quarter of fiscal 2024 were $28.5 million, up 63 percent from $17.5 million in the same quarter last year.

Interest income from investment securities decreased $31,000, or six percent, to $517,000 in the third quarter of fiscal 2024 from $548,000 for the same quarter of fiscal 2023. This decrease was attributable to a lower average balance, partly offset by a higher average yield. The average balance of investment securities decreased $26.3 million, or 16 percent, to $141.4 million in the third quarter of fiscal 2024 from $167.7 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. The average yield on investment securities increased 15 basis points to 1.46 percent in the third quarter of fiscal 2024 from 1.31 percent for the same quarter last year. The increase in the average yield was primarily attributable to a lower premium amortization during the current quarter in comparison to the same quarter last year ($124,000 vs. $181,000) due to lower total principal repayments ($5.7 million vs. $6.9 million) and the upward repricing of adjustable-rate mortgage-backed securities.

The FHLB – San Francisco distributed $210,000 of cash dividends to the Bank on its stock in the third quarter of fiscal 2024, up 44 percent from $146,000 in the same quarter last year. The average balance of FHLB – San Francisco stock in the third quarter of fiscal 2024 was $9.5 million, up 16 percent from $8.2 million in the same quarter of fiscal 2023 while the average yield was 8.84 percent, up 175 basis points from 7.09 percent.

Interest income from interest-earning deposits, primarily cash deposited at the FRB of San Francisco, was $397,000 in the third quarter of fiscal 2024, up 39 percent from $286,000 in the same quarter of fiscal 2023. The increase was due to a higher average yield and a higher average balance. The average yield earned on interest-earning deposits in the third quarter of fiscal 2024 was 5.40 percent, up 75 basis points from 4.65 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 increased $4.5 million, or 18 percent, to $29.1 million in the third quarter of fiscal 2024 from $24.6 million in the same quarter last year primarily due to the Bank increasing its liquidity position.

For the Nine Months Ended March 31, 2024 and 2023. Total interest income increased $7.7 million, or 23 percent, to $40.8 million for the first nine months of fiscal 2024 from $33.1 million in the same period of fiscal 2023. The increase was due primarily to an increase in interest income from loans receivable and, to a lesser extent, interest income on interest-earning deposits.

Interest income from loans receivable increased $7.0 million, or 23 percent, to $37.4 million in the first nine months of fiscal 2024 from $30.4 million for the same period of fiscal 2023. The increase was due to a higher average yield and, to a lesser extent, a higher average balance. The average yield on loans receivable increased 64 basis points to 4.64 percent during the first nine months of fiscal 2024 from 4.00 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 $664,000 in the first nine months of fiscal 2024 from $726,000 in the same period of fiscal 2023. Adjustable-rate loans of approximately $302.2 million repriced upward in the first nine months of fiscal 2024 by approximately 104 basis points from an average yield of 6.35 percent to 7.39 percent. The average balance of loans receivable increased by $60.8 million, or six percent, to $1.07 billion for the first nine months of fiscal 2024 from $1.01 billion in the same period of fiscal 2023. Total loans originated for investment in the first nine months of fiscal 2024 were $56.9 million, down 73 percent from $212.8 million in the same period last year. Loan principal payments received in the first nine months of fiscal 2024 were $69.3 million, down 10 percent from $77.2 million in the same period last year.

Interest income from investment securities decreased $67,000, or four percent, to $1.6 million in the first nine months of fiscal 2024 as compared to the same period of fiscal 2023. This decrease was attributable to a lower average balance, partly offset by a higher average yield. The average balance of investment securities decreased by $28.4 million, or 16 percent, to $147.4 million in the first nine months of fiscal 2024 from $175.8 million in the same period of fiscal 2023. The decrease in the average balance of investment securities was primarily the result of scheduled and accelerated principal payments on mortgage-backed securities. The average yield on investment securities increased by 18 basis points to 1.42 percent in the first nine months of fiscal 2024 from 1.24 percent in the same period of fiscal 2023. The increase in the average yield was primarily attributable to a lower premium amortization ($416,000 compared to $622,000) attributable to lower total principal repayments ($18.2 million vs. $23.8 million) and, to a lesser extent, the upward repricing of adjustable rate mortgage-backed securities.

The FHLB – San Francisco cash dividends received in the first nine months of fiscal 2024 were $586,000, up 42 percent from $414,000 in the same period of fiscal 2023. The average balance of FHLB – San Francisco stock in the first nine months of fiscal 2024 was $9.5 million, up 16 percent from $8.2 million in the same period of fiscal 2023, and the average yield was 8.22 percent, up 152 basis points from 6.70 percent.

Interest income from interest-earning deposits, primarily cash deposited at the FRB of San Francisco, was $1.3 million in the first nine months of fiscal 2024, up 94 percent from $666,000 in the same period of fiscal 2023. The increase was due to a higher average yield and, to a lesser extent, a higher average balance. The average yield earned on interest-earning deposits increased by 176 basis points to 5.38 percent in the first nine months of fiscal 2024 from 3.62 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 2024 was $31.5 million, an increase of $7.3 million or 30 percent, from $24.2 million in the same period of fiscal 2023.

Interest Expense:

For the Quarters Ended March 31, 2024 and 2023. Total interest expense increased $2.6 million or 100 percent to $5.2 million in the third quarter of fiscal 2024 from $2.6 million 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 2024 was $2.7 million, a 204 percent increase from $879,000 for the same quarter last year. The increase in interest expense on deposits was attributable to a higher average cost and, to a lesser extent, a higher average balance of time deposits. The average cost of deposits was 1.18 percent for the third quarter of fiscal 2024, up 81 basis points from 0.37 percent in the same quarter last year, primarily attributable to the average cost of time deposits (including brokered certificates of deposit) which increased 199 basis points to 3.86 percent for the third quarter of fiscal 2024 from 1.87 percent in the same quarter of fiscal 2023. The average balance of deposits decreased five percent to $910.8 million in the third quarter of fiscal 2024 from $962.0 million in the same quarter last year due to decreases in transaction accounts which was partly offset by an increase in time deposits. The average balance of transaction accounts was $651.5 million in the third quarter of fiscal 2024, down 18 percent from $792.9 million in the same quarter last year; while the average balance of time deposits (including brokered certificates of deposit) increased 53 percent to $259.3 million in the third quarter of fiscal 2024 from $169.1 million in the same quarter last year.

Interest expense on borrowings, consisting of FHLB – San Francisco advances, for the third quarter of fiscal 2024 increased $845,000, or 49 percent, to $2.6 million from $1.7 million for the same quarter last year. The increase was primarily the result of a higher average balance and, to a lesser extent, a higher average cost of borrowings. The average balance of borrowings increased $47.1 million or 27 percent to $223.6 million in the third quarter of fiscal 2024 from $176.5 million in the same quarter last year and the average cost of borrowings increased 66 basis points to 4.63 percent in the third quarter of fiscal 2024 from 3.97 percent in the same quarter last year.

For the Nine Months Ended March 31, 2024 and 2023. Total interest expense increased $9.0 million, or 170 percent to $14.3 million in the first nine months of fiscal 2024 from $5.3 million in the same period 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 first nine months of fiscal 2024 was $6.8 million, a 300 percent increase from $1.7 million for the same period last year. The increase in interest expense on deposits was primarily attributable to a higher average cost of time deposits, and to a lesser extent, a higher average balance of time deposits. The average cost of deposits was 0.99 percent, up 76 basis points from 0.23 percent in the same period last year, primarily attributable to time deposits (including brokered certificates of deposit) which increased 230 basis points to 3.54 percent for the first nine months of fiscal 2024 from 1.24 percent for the same period in fiscal 2023. The average balance of deposits decreased $40.3 million or four percent to $921.9 million in the first nine months of fiscal 2024 from $962.2 million in the same period last year due primarily to a decrease of $134.6 million in the average balance of transaction accounts, partly offset by an increase of $94.3 million in the average balance of time deposits.

Interest expense on borrowings, consisting primarily of FHLB – San Francisco advances, for the first nine months of fiscal 2024 increased $3.8 million, or 103 percent, to $7.5 million from $3.7 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 $78.3 million or 54 percent to $222.2 million in the first nine months of fiscal 2024 from $143.9 million in the same period last year, and the average cost of borrowings increased 112 basis points to 4.50 percent in the first nine months of fiscal 2024 from 3.38 percent in the same period last year

The following table presents the average balance sheets for the quarters and nine months ended March 31, 2024 and 2023, respectively. Average balances of loans receivable, net include non-performing loans. Amortization of net deferred loan costs is included with interest income on loans receivable. Average balances are calculated using daily balances.

Average Balance Sheets

(Dollars In Thousands)

(1) Includes the average balance of non-performing loans of $2.1 million and $1.0 million and net deferred loan cost amortization of $255 thousand and $228 thousand for the quarters ended March 31, 2024 and 2023, respectively.

(2) Includes the average balance of noninterest-bearing checking accounts of $91.0 million and $107.1 million during the quarters ended March 31, 2024 and 2023, respectively.

(3) Includes the average balance of uninsured deposits (adjusted lower by collateralized deposits) of approximately $139.0 million and $167.6 million in the quarters ended March 31, 2024 and 2023, respectively.

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

(5) Represents net interest income before provision for (recovery of) credit losses as a percentage of average interest-earning assets.

(Dollars In Thousands)

(1) Includes the average balance of non-performing loans of $1.7 million and $1.1 million and net deferred loan cost amortization of $664 thousand and $727 thousand for the nine months ended March 31, 2024 and 2023, respectively.

(2) Includes the average balance of noninterest-bearing checking accounts of $98.9 million and $115.4 million during the nine months ended March 31, 2024 and 2023, respectively.

(3) Includes the average balance of uninsured deposits (adjusted lower by collateralized deposits) of approximately $139.1 million and $182.2 million in the nine months ended March 31, 2024 and 2023, respectively.

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

(5) Represents net interest income before provision for (recovery of) credit losses as a percentage of average interest-earning assets.

The following table sets forth the effects of changing rates and volumes on interest income and expense for the quarters and nine months ended March 31, 2024 and 2023, 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

(In Thousands)

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

(In Thousands)

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

Provision for (Recovery of) Credit Losses:

For the Quarters Ended March 31, 2024 and 2023. During the third quarter of fiscal 2024, the Corporation recorded a provision for credit losses of $124,000, down 27 percent from a $169,000 provision for credit losses recorded during the same period last year. The provision for credit losses recorded in the third quarter of fiscal 2024 was primarily attributable to a longer estimated life of the single-family loan portfolio resulting from increased market interest rates and lower loan prepayment estimates, while the outstanding balance of loans held for investment at March 31, 2024 declined one percent to $1.07 billion from $1.08 billion at December 31, 2023.

For the Nine Months Ended March 31, 2024 and 2023. During the first nine months of fiscal 2024, the Corporation recorded a recovery of credit losses of $51,000, compared to a provision for credit losses of $430,000 in the same period of fiscal 2023. The recovery of credit losses recorded in the first nine months of fiscal 2024 was primarily attributable to a shorter estimated life of the loan portfolio resulting in higher loan prepayment estimates and the decline in the outstanding balance of loans held for investment at March 31, 2024 to $1.07 billion from $1.08 billion at June 30, 2023.

On July 1, 2023, the Corporation adopted ASC 326 resulting in a one-time increase to the ACL of $1.2 million, an $824,000 reduction to stockholders’ equity, a $345,000 increase to deferred tax assets and a $28,000 decrease to the mark on loans held at fair value. Prior to July 1, 2023, the allowance for loan losses was calculated using the incurred loss methodology, which is not directly comparable to the new CECL methodology used to calculate ACL due to the future forecast of loss component within CECL.

At March 31, 2024, the ACL on loans held for investment was $7.1 million, comprised of collectively evaluated allowances of $7.1 million and individually evaluated allowances of $37,000; up 20 percent from $5.9 million at June 30, 2023. The ACL on loans as a percentage of gross loans held for investment was 0.67 percent at March 31, 2024, compared to 0.55 percent at June 30, 2023. The increase in the ACL on loans was due primarily to the adoption of the CECL methodology ($1.2 million), partly offset by the recovery of credit losses in the first nine months of fiscal 2024 ($51,000, which includes $16,000 for the recovery of unfunded loan commitment reserves).

The following chart quantifies the factors contributing to the changes in the ACL on loans held for investment (“LHFI”) for the quarter and nine months ended March 31, 2024 subsequent to the adoption of the CECL methodology on July 1, 2023.

The changes in the ACL on LHFI for the quarter ended March 31, 2024:

The changes in the ACL on LHFI for the nine months ended March 31, 2024:

Management considers, based on currently available information, the ACL on loans sufficient to absorb expected losses in loans held for investment. See “Asset Quality” below and Note 5 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements in this Form 10-Q for additional discussion regarding the ACL on LHFI.

Non-Interest Income:

For the Quarters Ended March 31, 2024 and 2023. Non-interest income decreased $133,000, or 14 percent, to $848,000 in the third quarter of fiscal 2024 from $981,000 in the same period last year, due to decreases in all non-interest income categories.

For the Nine Months Ended March 31, 2024 and 2023. Non-interest income decreased $466,000, or 16 percent, to $2.5 million for the nine months ended March 31, 2024 from $2.9 million for the same period last year, due to decreases in all non-interest income categories.

Non-Interest Expense:

For the Quarters Ended March 31, 2024 and 2023. Non-interest expenses increased $244,000 or four percent to $7.2 million in the third quarter of fiscal 2024 from $6.9 million in the same quarter last year. The increase in the non-interest expense in the third quarter of fiscal 2024 was primarily due to higher salaries and employee benefits, and, to a lesser extent, higher equipment and professional expenses, partly offset by lower sales and marketing and other expenses.

Salaries and employee benefits increased $181,000, or four percent, to $4.5 million in the third quarter of fiscal 2024 from $4.4 million in the same quarter of fiscal 2023, representing the largest increase in non-interest expense. The increase was due primarily to higher compensation expenses and accruals for the supplemental executive retirement plans, partly offset by lower incentive compensation expenses.

For the Nine Months Ended March 31, 2024 and 2023. Non-interest expense in the nine months ended March 31, 2024 was $21.4 million, an increase of $705,000 or three percent, compared to $20.7 million in the comparable period last year. The increase was primarily attributable to an increase in salaries and employee benefits and, to a lesser extent, increases in premises and occupancy, equipment and deposit insurance premiums and regulatory assessments expenses.

Salaries and employee benefits increased $341,000, or three percent, to $13.2 million in the first nine months of fiscal 2024 from $12.9 million in the same period of fiscal 2023. The increase was due primarily to higher compensation expenses and accruals for the supplemental executive retirement plans, partly offset by lower incentive compensation expenses.

Premises and occupancy expenses increased $141,000, or six percent, to $2.6 million in the first nine months of fiscal 2024 from $2.5 million in the same period of fiscal 2023, primarily due to higher office rents, building security expenses and depreciation of fixtures. Equipment expense increased $114,000, or 13 percent, to $962,000 in the first nine months of fiscal 2024 from $848,000 in the same period of fiscal 2023. Deposit insurance premiums and regulatory assessments increased $131,000, or 28 percent, to $596,000 in the first nine months of fiscal 2024 from $465,000 in the same period of fiscal 2023, primarily due to the increase in the FDIC assessment rate starting in January 2023.

Provision for Income Taxes:

The income tax provision reflects accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income, adjusted for the effect of all permanent differences between income for tax and financial reporting purposes, such as non-deductible stock-based compensation and 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 Ended March 31, 2024 and 2023. The income tax provision was $620,000 for the third quarter of fiscal 2024, down 36 percent from $966,000 in the same quarter last year primarily due to lower pre-tax income. The effective tax rate in the third quarter of fiscal 2024 was 29.3 percent as compared to 29.4 percent in the same quarter last year.

For the Nine Months Ended March 31, 2024 and 2023. The Corporation’s income tax provision was $2.2 million for the first nine months of fiscal 2024, a 21 percent decrease from $2.8 million in the comparable period last year, primarily reflecting lower pre-tax income. The effective income tax rate for the nine months ended March 31, 2024 and 2023 was 29.2 percent and 29.3 percent, respectively. The Corporation believes that the effective income tax rates applied in the first nine months of fiscal 2024 reflect its current income tax obligations.

Asset Quality

Non-performing assets were comprised solely of non-performing loans at both March 31, 2024 and June 30, 2023. Non-performing loans, net of the ACL, consisting of loans with collateral located in California, were $2.2 million at March 31, 2024, up 73 percent from $1.3 million at June 30, 2023. Non-performing loans as a percentage of LHFI March 31, 2024 was 0.21 percent, compared to 0.12 percent at June 30, 2023. Non-performing loans at March 31, 2024 and June 30, 2023 were comprised of nine and six single-family loans, respectively. 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 either March 31, 2024 or June 30, 2023. For further analysis on non-performing loans, see the tables below and 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 credit 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 to California 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 LHFI 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 ACL, at the dates indicated:

(In Thousands)

The following table summarizes classified assets, which is comprised of classified loans, net of ACL and real estate owned, if any, at the dates indicated:

(Dollars In Thousands)

Loan Volume Activities

The following table provides details related to the volume of loan originations, sales and principal payments for the quarters and nine months indicated:

(In Thousands)

(1) Includes net changes in undisbursed loan funds, deferred loan fees or costs, ACL, 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 the FRB 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 2024 and 2023, the Corporation originated loans held for investment of $56.9 million and $212.8 million, respectively. At March 31, 2024, the Corporation had loan origination commitments totaling $5.1 million, undisbursed lines of credit totaling $809,000 and undisbursed construction loan funds totaling $586,000. The Corporation anticipates that it will have sufficient funds available to meet its current loan commitments. During the first nine months of fiscal 2024 and 2023, total loan repayments were $69.3 million and $77.2 million, respectively.

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 2024, total deposits decreased $42.5 million, or four percent, to $908.1 million, due primarily to a decrease in transaction accounts, partly offset by an increase in time deposits. The time deposits include brokered certificates of deposit totaling $130.9 million and $106.4 million at March 31, 2024 and June 30, 2023, respectively. At March 31, 2024, time deposits with a principal amount of $250,000 or less and scheduled to mature in one year or less were $193.8 million and total time deposits with a principal amount of more than $250,000 and scheduled to mature in one year or less were $37.9 million. Historically, the Corporation has been able to retain most 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. At March 31, 2024, total cash and cash equivalents were $51.7 million, or four percent of total assets. Depending on market conditions and the pricing of deposit products, the Bank may rely on FHLB – San Francisco advances for part of its liquidity needs. As of March 31, 2024, total borrowings were $235.0 million and the financing availability at the FHLB – San Francisco was limited to 40 percent of total assets. As a result, the remaining borrowing capacity available was $269.2 million and the remaining available collateral was $431.2 million at March 31, 2024. In addition, the Bank has secured a $172.7 million discount window facility at the FRB of San Francisco, collateralized by investment securities and single-family fixed-rate loans with a total balance of $236.8 million. As of March 31, 2024, 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 facilities as of March 31, 2024.

The Bank continues to work with both the FHLB - San Francisco and FRB 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. The total available borrowing capacity across all sources totaled approximately $491.9 million at March 31, 2024.

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 March 31, 2024 decreased slightly to 17.2 percent from 18.1 percent for the quarter ended June 30, 2023.

On September 28, 2023, the Board of Directors approved a new stock repurchase plan, authorizing up to 350,353 shares of the Corporation’s outstanding common stock to be purchased over a one-year period. As of March 31, 2024, a total of 237,592 shares or 68 percent of authorized shares for repurchase under the September 2023 plan remain available to purchase until the plan expires on September 28, 2024. 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’ 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 cash dividend payments during fiscal 2024 at $0.14 per share, our average total dividend paid each quarter would be approximately $965,000 based on the number of outstanding shares at March 31, 2024. At March 31, 2024, the Corporation (on an unconsolidated basis) had liquid assets of $5.2 million.

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.

At March 31, 2024, the Bank exceeded all regulatory capital requirements. The Bank was categorized as "well-capitalized" at March 31, 2024 under the regulations of the OCC. As a bank holding company registered with the Federal Reserve, Provident Financial Holdings, Inc. is also subject to the capital adequacy requirements of the Federal Reserve. For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis, and the Federal

Reserve expects the holding company’s subsidiary bank to be well capitalized under the prompt corrective action regulations.

The Bank’s actual and required minimum capital amounts and ratios at the dates indicated are as follows (dollars in thousands):

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

(2) The Bank elected to recognize the full $824 thousand adjustment to retained earnings resulting from the adoption of CECL on July 1, 2023 instead of over the permitted three-year phase-in option.

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 thereafter would cause its net worth to be reduced below the regulatory capital requirements imposed by federal regulation.

Supplemental Information

One of the Corporation’s principal financial objectives is to achieve long-term profitability while reducing its exposure to fluctuating interest rates. The Corporation has sought to reduce the exposure of its earnings to changes in interest rates by attempting to manage the repricing mismatch between interest-earning assets and interest-bearing liabilities. The principal element in achieving this objective is to increase the interest-rate sensitivity of the Corporation’s interest-earning assets by retaining for its portfolio new loan originations with interest rates subject to periodic adjustment to market conditions.

In addition, the Corporation maintains an investment portfolio, which is largely comprised of U.S. government sponsored enterprise MBS with contractual maturities of up to 30 years that reprice frequently or have a relatively short average life. The Corporation relies on retail deposits as its primary source of funds while utilizing FHLB – San Francisco advances and, from time to time, brokered certificates of deposit as a secondary source of funding. Management believes retail deposits, unlike brokered certificates of deposit, reduces the effects of interest rate fluctuations because they generally represent a more stable source of funds. As part of its interest rate risk management strategy, the Corporation promotes transaction accounts and time deposits with terms up to seven years.

Using an internal interest rate risk model, the Corporation is able to analyze its interest rate risk exposure by measuring the change in net portfolio value (“NPV”) over a variety of interest rate scenarios. NPV is defined as the net present value of expected future cash flows from assets, liabilities and off-balance sheet contracts. The calculation is intended to illustrate the change in NPV that would occur in the event of an immediate change in interest rates of -300, -200, -100, +100, +200 and +300 basis points (“bp”) with no consideration given to steps that management might take to counter the effect of the interest rate movement. As of March 31, 2024, the targeted federal funds rate range was 5.25% to 5.50%.

The following table is derived from the internal interest rate risk model and represents the NPV based on the indicated changes in interest rates as of March 31, 2024 (dollars in thousands).

(1) Represents the increase (decrease) of the NPV at the indicated interest rate change to the NPV at March 31, 2024 (“base case”).

(2) Derived from the NPV divided by the portfolio value of assets.

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

The following table is derived from the interest rate risk model and represents the change in the NPV at a +200 basis point rate shock at March 31, 2024 and -200 basis point rate shock at June 30, 2023, each of which scenarios were the lowest shock of plus or minus 200 basis point rate shocks.

The pre-shock NPV ratio increased 62 basis points to 9.91 percent at March 31, 2024 from 9.29 percent at June 30, 2023 and the post-shock NPV ratio increased 66 basis points to 9.03 percent at March 31, 2024 from 8.37 percent at June 30, 2023. The increase of the pre-shock NPV ratio was primarily attributable to the net income in the first nine months of fiscal 2024, partly offset by a $7.0 million cash dividend distribution from the Bank to Provident Financial Holdings in September 2023 and an $824,000 decrease in stockholders’ equity resulting from the CECL adoption, the changes in market interest rates and the composition of the balance sheet.

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

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

The following table represents the interest rate gap analysis of the Corporation’s assets and liabilities as of March 31, 2024:

(Dollars In Thousands)

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

The static gap analysis under “12 months or less” duration, “Greater than 1 year to 3 years” duration and “Greater than 3 years to 5 years” duration show negative positions in the "Cumulative repricing gap - dollar amount" category, indicating more liabilities are sensitive to repricing than assets in the short and intermediate terms. Management views noninterest-bearing deposits to be the least sensitive to changes in market interest rates and these accounts are therefore characterized as long-term funding. Interest-bearing checking deposits are considered more sensitive, followed by increased sensitivity for savings and money market deposits. For the purpose of calculating gap, a portion of these interest-bearing deposit balances are assumed to be subject to estimated repricing as follows: interest-bearing checking deposits at 15% per year, savings deposits at 20% per year and money market deposits at 50% in the first and second years.

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

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

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

• The Corporation’s current balance sheet and repricing characteristics;
• Forecasted balance sheet growth consistent with the business plan;
• Current interest rates and yield curves and management estimates of projected interest rates;
• Embedded options, interest rate floors, periodic caps and lifetime caps;
• Repricing characteristics for market rate sensitive instruments;
• Loan, investment securities, deposit and borrowing cash flows;
• Loan prepayment estimates for each type of loan; and
• Immediate, permanent and parallel movements in interest rates of +300, +200 and +100, and -100, -200 and -300 basis points.

The following table describes the results of the sensitivity of the net interest income analysis at March 31, 2024 and June 30, 2023.

At March 31, 2024, the Corporation was close to a neutral position as its interest-bearing liabilities and interest-earning assets are expected to reprice similarly during the subsequent 12-month period. Therefore, in a rising or falling interest rate environment, the model projects a slight decrease in net interest income over the subsequent 12-month period for all scenarios.

At June 30, 2023, the Corporation was liability sensitive as its interest-bearing liabilities were expected to reprice more quickly than its interest-earning assets during the subsequent 12-month period. Therefore, in a rising interest rate environment, the model projects a decrease in net interest income over the subsequent 12-month period. In a falling interest rate environment, the results project an increase in net interest income over the subsequent 12-month period at the -100 basis point scenario and a decrease in net interest income over the subsequent 12-month period for the -200 and -300 basis point scenarios.

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

(a) An evaluation of the Corporation’s disclosure controls and procedures (as defined in Section 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934 (the “Act”)) was carried out under the supervision and with the participation of the Corporation’s Chief Executive Officer (principal executive officer), Chief Financial Officer (principal financial and accounting officer) and the Corporation’s Disclosure Committee as of the end of the period covered by this quarterly report. In designing and evaluating the Corporation’s disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Also, because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been detected. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures as of March 31, 2024 were effective, at the reasonable assurance level, in ensuring that the information required to be disclosed by the Corporation in the reports it files or submits under the Act is (i) accumulated and communicated to the Corporation’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) There have been no changes in the Corporation’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended March 31, 2024, that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting. The Corporation does not expect that its internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

There have been no material changes in the risk factors previously disclosed in Part I, Item 1A of the Corporation’s 2023 Annual Form 10-K.