EXHIBIT 13
2016 Annual Report to Stockholders
2016 Annual Report
Message From the Chairman
Dear Shareholders:
I am pleased to forward our Annual Report during the 60th Anniversary of our Company. It is a tremendous honor to represent the Company, to be the one, on behalf of the Company, accepting awards and recognition from local and state leaders who have acknowledged Provident for the positive impact it has made over the years, helping to make life better in the communities we serve. More importantly, to be the one that thanks our customers and employees for their loyalty and dedication.
Our fiscal 2016 results, net income of $7.5 million or $0.88 per share, were lower than last year and hampered because we made the strategic decision to stand firm on our underwriting standards in the face of an extremely competitive operating environment thereby reducing our growth rate. Additionally, mortgage banking experienced a more difficult year than last year as a result of interest rate volatility and the implementation of the October 2015 regulatory changes which seemed to freeze mortgage origination activity for a time as industry participants made sure their implementation complied with the new requirements. Nonetheless, we continue to improve on our ability to execute within each operating segment laying the foundation for improved financial results consistent with our multi-year objectives.
The fiscal 2016 Business Plan for Provident Bank forecast growth in loans held for investment, growth in retail deposits (primarily core deposits), control of operating expenses, and sound capital management decisions. For Provident Bank Mortgage, we established goals to change our product offerings consistent with the changing market, to increase the percentage of purchase money origination volume, to lower our operating expenses and to update our systems, policies and practices consistent with the new October 2015 regulatory requirements.
I am pleased to report that we have made progress in all of these specific initiatives. For Provident Bank, loan originations and purchases for the held for investment portfolio were $216.1 million in fiscal 2016, a 23 percent increase from $175.1 million in fiscal 2015, unfortunately the increased origination volume was tempered by a significant increase in loan prepayments resulting in a lower than forecast three percent increase in loans held for investment which was below our expectations; the core deposits balance increased by $39.1 million or seven percent at June 30, 2016 from the same date last year; operating expenses were essentially unchanged from the prior year; and finally, we paid a quarterly cash dividend of $0.12 per share in fiscal 2016 while repurchasing approximately 742,000 shares of our common stock.
Additionally, in fiscal 2016, Provident Bank Mortgage originated $2.0 billion of loans held for sale, a 21 percent decrease from fiscal 2015, with 54 percent originated from purchase money transactions and 46 percent originated from refinance transactions. Also, operating expenses in our mortgage banking business were essentially unchanged from the prior year and we implemented the changes needed to comply with the regulatory requirements by the October 2015 deadline.
Provident Bank
We remain committed to the long-term strategies implemented in prior years that we believe will improve our fundamental performance. For example, the percentage of investment securities to total assets remains at very low levels, the percentage of loans held for investment to total assets continues to increase and the percentage of preferred loans (multi-family, commercial real estate, construction and commercial business) to loans held for investment continues to expand. We intend to grow the Company with more aggressive goals this year but will remain disciplined in our execution, returning capital to shareholders in the form of cash dividends and common stock repurchases to the extent our opportunities are limited by overly aggressive competitors.
Similar to last year, during the course of fiscal 2017, we will emphasize prudent increases in loans held for investment; the growth of retail deposits; diligent control of operating expenses; and sound capital management decisions. We believe that successful execution of these strategies will enhance our franchise value while limiting our risk profile.
Provident Bank Mortgage
We continue to adjust our mortgage banking business model to current market fundamentals. During the course of fiscal 2016, we opened one mortgage banking retail office and reduced by 12 the total number of mortgage banking employees from the prior year. In fiscal 2017, we plan to: change our product offerings commensurate with the shifting market; continue our focus on purchase money originations versus refinance originations; and make changes to our operating expenses consistent with market opportunities.
A Final Word
In last year’s message, leading up to the 60th Anniversary of our Company, I recounted many important milestones. We achieved those milestones during good and bad economic times; and during periods of rapid and less than rapid growth. Over the course of those 60 years we established a corporate culture for our Company that sometimes reminds me of the famous story, the Tortoise and the Hare, attributed to the Greek fabulist Aesop. Of course, in my view, the application of the story to banking is consistent with the Tortoise who established a disciplined, steady pace to eventually win the race, rather than with the hare who carelessly fell asleep at a critical juncture in the race (although many familiar with the banking industry leading up to the Great
Recession may draw a different parallel). At Provident we approach our business in a similar manner to how the Tortoise approached the celebrated race. We are disciplined and steady, certainly; and we are also pragmatic, determined, nimble, thoughtful and resourceful. Our corporate culture is the reason Provident thrives today, becoming the largest independently owned community bank in Riverside County, underscoring 60 years of commitment to the customers and communities we serve while building the franchise value of the Company along the way.
In closing, I wish to thank our staff of banking professionals and the Board of Directors for their ongoing commitment and dedication; and express my appreciation for the sponsorship we receive from customers and shareholders. Truly, with your support, we have withstood the test of time.
Sincerely,
| /s/ Craig G. Blunden |
Craig G. Blunden
Chairman and Chief Executive Officer
Financial Highlights
The following tables set forth information concerning the consolidated financial position and results of operations of the Corporation and its subsidiary at the dates and for the periods indicated.
| At or For The Year Ended June 30, | ||||||||||||||||||||
| (In Thousands, Except Per Share Information) | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
| FINANCIAL CONDITION DATA: | ||||||||||||||||||||
| Total assets | $ | 1,171,381 | $ | 1,174,555 | $ | 1,105,629 | $ | 1,211,041 | $ | 1,260,917 | ||||||||||
| Loans held for investment, net | 840,022 | 814,234 | 772,141 | 748,397 | 796,836 | |||||||||||||||
| Loans held for sale, at fair value | 189,458 | 224,715 | 158,883 | 188,050 | 231,639 | |||||||||||||||
| Cash and cash equivalents | 51,206 | 81,403 | 118,937 | 193,839 | 145,136 | |||||||||||||||
| Investment securities | 51,522 | 14,961 | 17,147 | 19,510 | 22,898 | |||||||||||||||
| Deposits | 926,384 | 924,086 | 897,870 | 923,010 | 961,411 | |||||||||||||||
| Borrowings | 91,299 | 91,367 | 41,431 | 106,491 | 126,546 | |||||||||||||||
| Stockholders’ equity | 133,451 | 141,137 | 145,862 | 159,974 | 144,777 | |||||||||||||||
| Book value per share | 16.73 | 16.35 | 15.66 | 15.40 | 13.34 | |||||||||||||||
| OPERATING DATA: | ||||||||||||||||||||
| Interest income | $ | 39,304 | $ | 39,696 | $ | 38,059 | $ | 44,161 | $ | 51,435 | ||||||||||
| Interest expense | 6,975 | 6,421 | 7,336 | 10,804 | 14,705 | |||||||||||||||
| Net interest income | 32,329 | 33,275 | 30,723 | 33,357 | 36,730 | |||||||||||||||
| (Recovery) provision for loan losses | (1,715 | ) | (1,387 | ) | (3,380 | ) | (1,499 | ) | 5,777 | |||||||||||
| Net interest income after (recovery) provision for loan losses | 34,044 | 34,662 | 34,103 | 34,856 | 30,953 | |||||||||||||||
| Loan servicing and other fees | 1,068 | 1,085 | 1,077 | 1,093 | 733 | |||||||||||||||
| Gain on sale of loans, net | 31,521 | 34,210 | 25,799 | 68,493 | 38,017 | |||||||||||||||
| Deposit account fees | 2,319 | 2,412 | 2,469 | 2,449 | 2,438 | |||||||||||||||
(Loss) gain on sale and operations of real estate owned acquired in the settlement of loans, net | (95 | ) | 282 | 18 | 916 | (120 | ) | |||||||||||||
| Card and processing fees | 1,448 | 1,406 | 1,370 | 1,292 | 1,282 | |||||||||||||||
| Other non-interest income | 800 | 992 | 942 | 957 | 800 | |||||||||||||||
| Operating expenses | 58,259 | 57,969 | 54,168 | 67,343 | 55,365 | |||||||||||||||
| Income before income taxes | 12,846 | 17,080 | 11,610 | 42,713 | 18,738 | |||||||||||||||
| Provision for income taxes | 5,372 | 7,277 | 5,004 | 16,916 | 7,928 | |||||||||||||||
| Net income | $ | 7,474 | $ | 9,803 | $ | 6,606 | $ | 25,797 | $ | 10,810 | ||||||||||
| Basic earnings per share | $ | 0.90 | $ | 1.09 | $ | 0.67 | $ | 2.43 | $ | 0.96 | ||||||||||
| Diluted earnings per share | $ | 0.88 | $ | 1.07 | $ | 0.65 | $ | 2.38 | $ | 0.96 | ||||||||||
| Cash dividend per share | $ | 0.48 | $ | 0.45 | $ | 0.40 | $ | 0.24 | $ | 0.14 | ||||||||||
Financial Highlights
| At or For The Year Ended June 30, | |||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||
| KEY OPERATING RATIOS: | |||||||||||||||
| Performance Ratios | |||||||||||||||
| Return on average assets | 0.64 | % | 0.87 | % | 0.58 | % | 2.09 | % | 0.84 | % | |||||
| Return on average stockholders’ equity | 5.43 | 6.81 | 4.31 | 16.80 | 7.58 | ||||||||||
| Interest rate spread | 2.78 | 2.96 | 2.69 | 2.69 | 2.83 | ||||||||||
| Net interest margin | 2.85 | 3.03 | 2.79 | 2.80 | 2.95 | ||||||||||
| Average interest-earning assets to average interest-bearing liabilities | 111.75 | 113.02 | 113.54 | 112.46 | 110.53 | ||||||||||
| Operating and administrative expenses as a percentage of average total assets | 4.98 | 5.12 | 4.75 | 5.44 | 4.29 | ||||||||||
Efficiency ratio(1) | 83.96 | 78.70 | 86.81 | 62.03 | 69.31 | ||||||||||
| Stockholders’ equity to total assets ratio | 11.39 | 12.02 | 13.19 | 13.21 | 11.48 | ||||||||||
| Dividend payout ratio | 54.55 | 42.06 | 61.54 | 10.08 | 14.58 | ||||||||||
The Corporation's Regulatory Capital Ratios(2) | |||||||||||||||
| Tier 1 leverage capital (to adjusted average assets) | 11.40 | % | 11.94 | % | N/A | N/A | N/A | ||||||||
| CET1 capital (to risk-weighted assets) | 17.89 | 19.24 | N/A | N/A | N/A | ||||||||||
| Tier 1 capital (to risk-weighted assets) | 17.89 | 19.24 | N/A | N/A | N/A | ||||||||||
| Total capital (to risk-weighted assets) | 19.09 | 20.49 | N/A | N/A | N/A | ||||||||||
The Bank's Regulatory Capital Ratios(2) | |||||||||||||||
| Tier 1 leverage capital (to adjusted average assets) | 10.29 | % | 10.68 | % | 12.53 | % | 13.12 | % | 11.26 | % | |||||
| CET1 capital (to risk-weighted assets) | 16.16 | 17.22 | N/A | N/A | N/A | ||||||||||
| Tier 1 capital (to risk-weighted assets) | 16.16 | 17.22 | 18.72 | 21.36 | 17.53 | ||||||||||
| Total capital (to risk-weighted assets) | 17.36 | 18.47 | 19.98 | 22.64 | 18.79 | ||||||||||
| Asset Quality Ratios | |||||||||||||||
| Non-performing loans as a percentage of loans held for investment, net | 1.23 | % | 1.71 | % | 2.06 | % | 2.90 | % | 4.33 | % | |||||
| Non-performing assets as a percentage of total assets | 1.11 | 1.39 | 1.66 | 1.98 | 3.17 | ||||||||||
| Allowance for loan losses as a percentage of gross loans held for investment | 1.02 | 1.06 | 1.25 | 1.96 | 2.63 | ||||||||||
| Allowance for loan losses as a percentage of gross non-performing loans | 77.38 | 59.77 | 55.73 | 58.77 | 52.45 | ||||||||||
| Net (recoveries) charge-offs to average loans receivable, net | (0.17 | ) | (0.04 | ) | 0.21 | 0.51 | 1.38 | ||||||||
(1) | Non-interest expense as a percentage of net interest income and non-interest income. |
(2) | On January 1, 2015 the Corporation and the Bank implemented the Basel III capital protocol consistent with regulatory requirements which were not applicable in prior periods. |
Shareholder Information
ANNUAL MEETING
The annual meeting of shareholders will be held at the Riverside Art Museum at 3425 Mission Inn Avenue, Riverside, California on Thursday, November 17, 2016 at 11:00 a.m. (Pacific). A formal notice of the meeting, together with a proxy statement and proxy form, will be mailed to shareholders.
CORPORATE OFFICE
Provident Financial Holdings, Inc.
3756 Central Avenue
Riverside, CA 92506
(951) 686-6060
INTERNET ADDRESS
www.myprovident.com
SPECIAL COUNSEL
Breyer & Associates PC
8180 Greensboro Drive, Suite 785
McLean, VA 22102
(703) 883-1100
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
695 Town Center Drive, Suite 1200
Costa Mesa, CA 92626-7188
(714) 436-7100
TRANSFER AGENT
Computershare, Inc.
P.O. Box 43078
Providence, RI 02940
(800) 942-5909
MARKET INFORMATION
Provident Financial Holdings, Inc. is traded on the NASDAQ Global Select Market under the symbol PROV.
FINANCIAL INFORMATION
Requests for copies of the Form 10-K and Forms 10-Q filed with the Securities and Exchange Commission should be directed in writing to:
Donavon P. Ternes
President, COO and CFO
Provident Financial Holdings, Inc.
3756 Central Avenue
Riverside, CA 92506
CORPORATE PROFILE
Provident Financial Holdings, Inc. (the “Corporation”), a Delaware corporation, was organized in January 1996 for the purpose of becoming the holding company for 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 does not engage in any significant activity other than holding the stock of the Bank. The Bank serves the banking needs of select communities in Riverside and San Bernardino Counties and has mortgage lending operations in Southern and Northern California.
Board of Directors and Senior Officers
| Board of Directors | Senior Officers | |
| Joseph P. Barr, CPA | Provident Financial Holdings, Inc. | |
| Partner Emeritus | ||
| Swenson Accountancy Corporation | Craig G. Blunden | |
| Chairman and Chief Executive Officer | ||
| Bruce W. Bennett | ||
| Retired Health Care Executive | Donavon P. Ternes | |
| Private Investor | President, Chief Operating Officer, | |
| Chief Financial Officer, and | ||
| Craig G. Blunden | Corporate Secretary | |
| Chairman and Chief Executive Officer | ||
| Provident Financial Holdings, Inc. | Provident Bank | |
| Provident Bank | ||
| Craig G. Blunden | ||
| Judy A. Carpenter | Chairman and Chief Executive Officer | |
| President and Chief Operating Officer | ||
| Riverside Medical Clinic | Richard L. Gale | |
| Senior Vice President | ||
| Debbi H. Guthrie | Provident Bank Mortgage | |
| Executive Vice President and | ||
| Chief Communications Officer | Deborah L. Hill | |
| Raincross Hospitality Corporation | Senior Vice President | |
| Chief Human Resources and | ||
| Roy H. Taylor | Administrative Officer | |
| Chief Executive Officer | ||
| Hub International of California, Inc. | Lilian Salter | |
| Senior Vice President | ||
| William E. Thomas, Esq. | Chief Information Officer | |
| Principal | ||
| William E. Thomas, Inc., | Donavon P. Ternes | |
| a Professional Law Corporation | President, Chief Operating Officer, | |
| Chief Financial Officer, and | ||
| Corporate Secretary | ||
| David S. Weiant | ||
| Senior Vice President | ||
| Chief Lending Officer | ||
| Gwendolyn L. Wertz | ||
| Senior Vice President | ||
| Retail Banking | ||
Provident Locations
 |  | |
| RETAIL BANKING CENTERS | WHOLESALE MORTGAGE OFFICES | |
| Blythe | Pleasanton | |
| 350 E. Hobson Way | 5934 Gibraltar Drive, Suite 102 | |
| Blythe, CA 92225 | Pleasanton, CA 94588 | |
| Canyon Crest | Rancho Cucamonga | |
| 5225 Canyon Crest Drive, Suite 86 | 10370 Commerce Center Drive, Suite 200 | |
| Riverside, CA 92507 | Rancho Cucamonga, CA 91730 | |
| Corona | ||
| 487 Magnolia Avenue, Suite 101 | RETAIL MORTGAGE OFFICES | |
| Corona, CA 92879 | ||
| Carlsbad | ||
| Downtown Business Center | 2888 Loker Avenue East, Suite 202 | |
| 4001 Main Street | Carlsbad, CA 92010 | |
| Riverside, CA 92501 | ||
| City of Industry | ||
| Hemet | 18725 East Gale Avenue, Suite 100 | |
| 1690 E. Florida Avenue | City of Industry, CA 91748 | |
| Hemet, CA 92544 | ||
| Elk Grove | ||
| Home Office | 9245 Laguna Springs Drive, Suite 130 | |
| 6570 Magnolia Avenue | Elk Grove, CA 95758 | |
| Riverside, CA 92506 | ||
| Escondido | ||
| La Quinta | 362 West Mission Avenue, Suite 200 | |
| 78752 Highway 111 | Escondido, CA 92025 | |
| La Quinta, CA 92253 | ||
| Glendora | ||
| La Sierra | 1200 East Route 66, Suite 102 | |
| 3312 La Sierra Avenue, Suite 105 | Glendora, CA 91740 | |
| Riverside, CA 92503 | ||
| Livermore | ||
| Moreno Valley | 2578 Old First Street | |
| 12460 Heacock Street | Livermore, CA 94550 | |
| Moreno Valley, CA 92553 | ||
| Rancho Cucamonga | ||
| Orangecrest | 10370 Commerce Center Drive, Suite 110 | |
| 19348 Van Buren Boulevard, Suite 119 | Rancho Cucamonga, CA 91730 | |
| Riverside, CA 92508 | ||
| Riverside, Canyon Crest Drive | ||
| Rancho Mirage | 5225 Canyon Crest Drive, Suite 86 | |
| 71991 Highway 111 | Riverside, CA 92507 | |
| Ranch Mirage, CA 92270 | ||
| Riverside, Indiana Avenue | ||
| Redlands | 7111 Indiana Avenue, Suite 200 | |
| 125 E. Citrus Avenue | Riverside, CA 92504 | |
| Redlands, CA 92373 | ||
| Riverside, Riverside Avenue | ||
| Sun City | 6529 Riverside Avenue, Suite 160 | |
| 27010 Sun City Boulevard | Riverside, CA 92506 | |
| Sun City, CA 92586 | ||
| Roseville | ||
| Temecula | 2998 Douglas Boulevard, Suite 105 | |
| 40705 Winchester Road, Suite 6 | Roseville, CA 95661 | |
| Temecula, CA 92591 | ||
| Santa Barbara | ||
3710 State Street, Suite B | ||
| Santa Barbara, CA 93105 | ||
| Victorville | ||
| 12180 Ridgecrest Street, Suite 116 | ||
| Victorville, CA 92395 | ||
| Westlake Village | ||
| 2659 Townsgate Road, Suite 105 | ||
| Westlake Village, CA 91361 | ||
Customer Information 1-800-442-5201 or www.myprovident.com | ||
Corporate Office
3756 Central Avenue, Riverside, CA 92506
(951) 686-6060
www.myprovident.com
NASDAQ Global Select Market - PROV