Provident Financial (US:PROV)2021-09-03 19:57PART I Business Provident Financial Holdings, Inc. operates as a Southern California community bank with $1.18 billion in assets as of June 30, 2021, focusing on deposits and real estate loans while navigating regulatory oversight and COVID-19 impacts Consolidated Financial Highlights as of June 30, 2021 | Metric | Amount (Millions) | | :--- | :--- | | Total Assets | $1,180 | | Total Deposits | $938.0 | | Stockholders' Equity | $127.3 | - The company's primary business activities consist of community banking, investment services, and trustee services for real estate transactions, with revenues derived principally from interest on its loan and investment portfolios1314 - The COVID-19 pandemic has significantly affected the company's communities, customers, and operations, leading to operational changes and uncertainties regarding its ultimate adverse impact16 Subsequent Events Details events occurring after the reporting period, including a declared cash dividend - On July 22, 2021, the Board of Directors declared a cash dividend of $0.14 per share, which was paid on September 2, 202118 Market Area The Bank operates 13 full-service offices primarily in the Inland Empire, where it is the largest independent community bank - The Bank operates 13 full-service banking offices, primarily in Riverside and San Bernardino counties (the "Inland Empire"), and is the largest independent community bank headquartered in Riverside County19 - In June 2021, the unemployment rate in the Inland Empire was 7.9%, higher than the national average of 5.9% but significantly lower than the 13.3% rate in June 2020. The median home price in the Inland Empire was $525,000, up 28% from June 20202021 Lending Activities The Bank's $851.0 million loan portfolio, primarily multi-family and single-family mortgages, is concentrated in California with a high proportion of adjustable-rate loans - Net loans held for investment were $851.0 million at June 30, 2021, a decrease from $902.8 million at June 30, 2020. The portfolio is primarily composed of multi-family (56.9%) and single-family (31.5%) mortgage loans27293647 Composition of Loans Held for Investment (Gross) | Loan Type | Amount at June 30, 2021 ($ thousands) | % of Total | Amount at June 30, 2020 ($ thousands) | % of Total | | :--- | :--- | :--- | :--- | :--- | | Single family | $268,272 | 31.48% | $298,810 | 33.04% | | Multi family | $484,408 | 56.85% | $491,903 | 54.38% | | Commercial real estate | $95,279 | 11.18% | $105,235 | 11.64% | | Construction | $3,040 | 0.36% | $7,801 | 0.86% | | Other mortgage loans | $139 | 0.02% | $143 | 0.02% | | Commercial business loans | $849 | 0.10% | $480 | 0.05% | | Consumer loans | $95 | 0.01% | $94 | 0.01% | | Total | $852,082 | 100.00% | $904,466 | 100.00% | - At June 30, 2021, 96% of loans held for investment due after one year had floating or adjustable interest rates, which helps mitigate interest rate risk32 - The Bank's real estate secured loans are geographically concentrated in California, with 53% in Southern California (excluding the Inland Empire), 27% in other parts of California, and 20% in the Inland Empire as of June 30, 202134 Loan Originations, Purchases, and Repayments (Fiscal Year) | Activity | 2021 ($ thousands) | 2020 ($ thousands) | | :--- | :--- | :--- | | Total loans originated for investment | 214,954 | 106,044 | | Total loans purchased for investment | 16,909 | 142,077 | | Loan principal repayments | (281,477) | (228,250) | Loan Servicing The Bank's loan servicing portfolio for others significantly decreased, leading to an impairment reserve on servicing assets - The Bank's loan servicing portfolio for others decreased by 42% to $50.4 million at June 30, 2021, from $86.5 million at June 30, 2020, primarily due to loan prepayments73 - Servicing assets had a carrying value of $384,000 and a fair value of $208,000 at June 30, 2021, with a required impairment reserve of $176,00076 Delinquencies and Classified Assets Non-performing assets increased, primarily due to COVID-19 related loan forbearance, while total classified assets decreased Non-Performing Assets Summary | Metric | June 30, 2021 ($ million) | June 30, 2020 ($ million) | | :--- | :--- | :--- | | Total Non-Performing Assets | $8.6 | $4.9 | | As a % of Total Assets | 0.73% | 0.42% | | Total Non-Performing Loans | $8.6 | $4.9 | | As a % of Net Loans | 1.02% | 0.55% | - The outstanding balance of troubled debt restructurings (TDRs) increased to $7.9 million (23 loans) at June 30, 2021, from $2.6 million (8 loans) at June 30, 2020. The increase was primarily due to 19 COVID-19 related forbearance loans being downgraded when their deferrals were extended beyond six months8586369 - Total classified assets, including special mention loans, decreased by 26% to $10.4 million at June 30, 2021, from $14.1 million at June 30, 202091 Allowance for Loan Losses Activity (Fiscal Year) | Metric | 2021 ($ thousands) | 2020 ($ thousands) | | :--- | :--- | :--- | | Allowance at beginning of period | $8,265 | $7,076 | | (Recovery) provision for loan losses | ($708) | $1,119 | | Net recoveries (charge-offs) | $30 | $70 | | Allowance at end of period | $7,587 | $8,265 | | Allowance as a % of gross loans | 0.88% | 0.91% | Investment Securities Activities The investment securities portfolio significantly increased to $226.9 million, primarily due to mortgage-backed securities purchases, with most held to maturity - The investment securities portfolio increased to $226.9 million at June 30, 2021, from $123.3 million at June 30, 2020, primarily due to the purchase of $158.0 million in mortgage-backed securities108 Investment Securities Composition | Security Type | Amortized Cost at June 30, 2021 ($ thousands) | % of Total | Amortized Cost at June 30, 2020 ($ thousands) | % of Total | | :--- | :--- | :--- | :--- | :--- | | Held to maturity | $223,306 | 98.4% | $118,627 | 96.3% | | Available for sale | $3,494 | 1.6% | $4,583 | 3.7% | | Total | $226,800 | 100.0% | $123,210 | 100.0% | Deposit Activities and Other Sources of Funds Total deposits grew with a strategic shift towards lower-cost transaction accounts, while FHLB borrowings decreased - Total deposits grew to $938.0 million at June 30, 2021. The deposit mix shifted towards lower-cost transaction accounts, which comprised 85% of total deposits, up from 81% in the prior year, while time deposits decreased to 15% from 19%115350 Deposit Composition as of June 30, 2021 | Deposit Type | Balance ($ thousands) | % of Total | | :--- | :--- | :--- | | Non interest-bearing checking | $123,179 | 13.13% | | Interest-bearing checking | $327,388 | 34.90% | | Savings accounts | $307,299 | 32.76% | | Money market accounts | $39,670 | 4.23% | | Time deposits | $140,437 | 14.98% | | Total Deposits | $937,973 | 100.00% | - Borrowings from the FHLB – San Francisco decreased to $101.0 million at June 30, 2021, from $141.0 million a year prior. The Bank maintained significant additional borrowing capacity119121 Subsidiary Activities The Bank operates three wholly-owned subsidiaries, with two currently inactive - The Bank has three wholly owned subsidiaries: Provident Financial Corp (PFC), which acts as a trustee and holds real estate; Profed Mortgage, Inc.; and First Service Corporation. The latter two are currently inactive127 Regulation The Corporation and Bank are extensively regulated by the OCC, FDIC, and Federal Reserve, with the Bank categorized as "well capitalized" - The Bank is primarily regulated by the Office of the Comptroller of the Currency (OCC) and the FDIC. The Corporation, as a savings and loan holding company, is regulated by the Federal Reserve Board (FRB)132 - As of June 30, 2021, the Bank met the Qualified Thrift Lender (QTL) test, with 90.3% of its portfolio assets in qualified thrift investments149 - The Bank was categorized as "well capitalized" under the regulatory framework for prompt corrective action as of June 30, 2021, exceeding all minimum capital requirements153156 Taxation The Corporation and Bank are subject to federal and state income taxes, with a pre-1988 bad debt reserve that could be subject to recapture - The Corporation and Bank are subject to federal and state income taxes. The Tax Cuts and Jobs Act of 2017 reduced the corporate federal income tax rate to a flat 21%190 - As of June 30, 2021, the Bank had a pre-1988 bad debt reserve for tax purposes of approximately $9.0 million, which would be subject to recapture into taxable income if certain non-dividend distributions were made191 Employees and Human Capital The Bank had 161 full-time equivalent employees as of June 30, 2021, with a predominantly female workforce and long average tenure - As of June 30, 2021, the Bank had 161 full-time equivalent employees. Approximately 75% of the workforce was female, and the average tenure was 10.1 years198199 Risk Factors The company faces diverse and significant risks, including macroeconomic, credit, market, regulatory, and operational challenges, particularly those stemming from its concentrated market and the ongoing COVID-19 pandemic - The COVID-19 pandemic has adversely impacted business operations and is expected to negatively affect financial results, with the ultimate impact remaining highly uncertain215 - The business is heavily dependent on the Southern California economy, and a regional downturn could increase loan delinquencies, reduce collateral values, and decrease demand for products and services223224 - Multi-family and commercial real estate loans, which constitute 68.0% of the loan portfolio, involve higher principal amounts and greater credit risk than single-family loans231233 - Fluctuating interest rates pose a significant risk to profitability by impacting net interest income, the value of the securities portfolio, and borrowers' ability to repay adjustable-rate loans248249 - The company faces cybersecurity risks, including potential breaches of its information systems, which could jeopardize confidential information, cause operational interruptions, and result in financial losses or reputational damage261263 - The planned discontinuation of the LIBOR interest rate index, to which a majority of the company's loans are tied, creates uncertainty and may result in significant transition expenses and potential disputes with customers273274 Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None289 Properties The Bank operates 13 retail offices (six owned, seven leased) primarily in Riverside County, with property and equipment valued at $7.3 million net book value - The Bank operates 13 retail banking offices, with 12 in Riverside County and one in San Bernardino County. Six of these properties are owned, and seven are leased290 Legal Proceedings The Corporation is not a party to any pending legal proceedings expected to have a material adverse effect on its financial condition or operations - The Corporation is not a party to any pending legal proceedings that it believes would have a material adverse effect on its financial condition, operations or cash flows291 Mine Safety Disclosures This item is not applicable to the Corporation - Not applicable292 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Corporation's common stock trades on NASDAQ under PROV, with a policy of quarterly cash dividends and recent share repurchases - The Corporation's common stock trades on the NASDAQ Global Select Market under the symbol PROV. As of June 30, 2021, there were 7,436,315 shares outstanding held by 436 shareholders of record294 - The Board of Directors has declared quarterly cash dividends consecutively since September 2002. A dividend of $0.14 per share was declared on July 22, 2021295297 Common Stock Purchases - Q4 FY2021 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2021 | 5,581 | $16.23 | | May 2021 | 35,254 | $16.47 | | June 2021 | 40,993 | $17.48 | | Total Q4 | 81,828 | $16.96 | - As of June 30, 2021, 266,833 shares remained available for future purchases under the April 2020 stock repurchase plan298 Selected Financial Data This section incorporates the "Financial Highlights" from the Corporation's Annual Report to Shareholders by reference Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal year 2021 net income decreased to $7.6 million due to lower net interest income, offset by a loan loss recovery and reduced non-interest expense, with assets growing to $1.18 billion and deposits shifting to lower-cost accounts Comparison of Financial Condition at June 30, 2021 and 2020 Total assets increased to $1.18 billion due to higher investment securities, offset by decreased loans and cash, while deposits grew with a shift to lower-cost funding - Total assets increased by $6.8 million (1%) to $1.18 billion, primarily due to a $103.6 million (84%) increase in investment securities, offset by a $51.8 million (6%) decrease in loans held for investment and a $45.7 million (39%) decrease in cash346347348349 - Total deposits increased by $45.0 million (5%) to $938.0 million, with transaction accounts growing by 10% while time deposits decreased by 17%, reflecting a strategic shift to lower-cost funding350 - Borrowings decreased by $40.0 million (28%) to $101.0 million due to scheduled maturities and prepayments of FHLB advances351 Comparison of Operating Results for the Years Ended June 30, 2021 and 2020 Net income slightly decreased due to lower net interest income, largely offset by a loan loss recovery and reduced non-interest expenses, including an ERTC credit Key Operating Results (Fiscal Year) | Metric | 2021 (Millions) | 2020 (Millions) | | :--- | :--- | :--- | | Net Income | $7.6 | $7.7 | | Diluted EPS | $1.00 | $1.01 | | Return on Average Assets | 0.64% | 0.69% | | Return on Average Stockholders' Equity | 6.05% | 6.26% | - Net interest income decreased by $5.8 million (16%) to $30.6 million, as the net interest margin fell 70 basis points to 2.66% due to a sharp decline in the average yield on interest-earning assets355 - The company recorded a $708,000 recovery from the allowance for loan losses in fiscal 2021, compared to a $1.1 million provision in fiscal 2020. The recovery was driven by an improved economic outlook and a decrease in the loan portfolio366 - Non-interest expense decreased by $3.2 million (11%) to $25.7 million, primarily due to a $3.7 million decrease in salaries and benefits, which included a $2.4 million credit from the Employee Retention Tax Credit (ERTC)377378474 Average Balances, Interest and Average Yields/Costs The net interest margin compressed due to a significant decline in the average yield on interest-earning assets Net Interest Margin Analysis (Fiscal Year) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Average Yield on Interest-Earning Assets | 3.06% | 3.92% | | Average Cost of Interest-Bearing Liabilities | 0.44% | 0.62% | | Net Interest Spread | 2.62% | 3.30% | | Net Interest Margin | 2.66% | 3.36% | Liquidity and Capital Resources The Bank maintains strong liquidity through deposits, loan repayments, and FHLB advances, exceeding all minimum regulatory capital requirements - Primary sources of funds are deposits, loan repayments, and FHLB advances. At June 30, 2021, cash and cash equivalents were $70.3 million391394 - The Bank maintained significant borrowing capacity, with $296.8 million available from the FHLB-San Francisco and a $206.1 million discount window facility at the Federal Reserve Bank394 Bank Regulatory Capital Ratios as of June 30, 2021 | Ratio | Actual | Minimum to be Well Capitalized | | :--- | :--- | :--- | | Tier 1 Leverage Capital | 10.19% | 5.00% | | CET1 Capital | 18.58% | 6.50% | | Tier 1 Capital | 18.58% | 8.00% | | Total Capital | 19.76% | 10.00% | Quantitative and Qualitative Disclosures about Market Risk The Corporation manages interest rate risk, showing asset sensitivity where a +100 basis point rate shock is estimated to increase Net Portfolio Value by $42.5 million and Net Interest Income by 0.23% Net Portfolio Value (NPV) Sensitivity Analysis as of June 30, 2021 | Rate Change (Basis Points) | Change in NPV ($ thousands) | NPV as % of Portfolio Value Assets | | :--- | :--- | :--- | | +300 bp | $102,842 | 19.50% | | +200 bp | $75,230 | 17.72% | | +100 bp | $42,534 | 15.53% | | Base Case | $0 | 12.54% | | -100 bp | ($17,691) | 11.25% | Net Interest Income (NII) Sensitivity Analysis (Next 12 Months) | Rate Change (Basis Points) | Change in NII (as of June 30, 2021) | | :--- | :--- | | +300 bp | +4.55% | | +200 bp | +2.06% | | +100 bp | +0.23% | | -100 bp | +0.22% | Financial Statements and Supplementary Data This section incorporates the Consolidated Financial Statements and Notes to Consolidated Financial Statements by reference Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - None419 Controls and Procedures Management, including the CEO and CFO, concluded that the Corporation's disclosure controls and internal control over financial reporting were effective as of June 30, 2021 - The CEO and CFO concluded that the Corporation's disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2021421 - Management concluded that as of June 30, 2021, the Corporation's internal control over financial reporting was effective based on the criteria established in the Internal Control-Integrated Framework (2013)425 Other Information This item is not applicable PART III Directors, Executive Officers and Corporate Governance Information on directors is incorporated by reference from the Proxy Statement, and the company has a Code of Ethics and an audit committee with a financial expert - Information regarding the Board of Directors is incorporated by reference from the Proxy Statement431 - The Corporation has adopted a Code of Ethics and has a designated audit committee financial expert, Joseph P. Barr433434 Executive Compensation Information regarding executive compensation is incorporated by reference from the company's Proxy Statement Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the company's Proxy Statement Equity Compensation Plan Information as of June 30, 2021 | Plan Category | Securities to Be Issued Upon Exercise (a) | Weighted-Average Exercise Price (b) | Securities Available for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | | | | | Stock Options | 417,000 | $16.22 | 57,500 | | Restricted Stock | 101,250 | N/A | 62,750 | | Total | 518,250 | $16.22 | 120,250 | Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the company's Proxy Statement Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's Proxy Statement PART IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K, including corporate governance and employment documents Consolidated Financial Statements Notes to Consolidated Financial Statements These notes detail the Corporation's accounting policies and financial data, covering loan loss allowance, investment securities, loan portfolio credit quality, deposits, borrowings, regulatory capital, and fair value measurements Note 2: Investment Securities This note provides a detailed breakdown of the investment securities portfolio by type, amortized cost, and estimated fair value Investment Securities by Type as of June 30, 2021 | Security Type | Amortized Cost ($ thousands) | Estimated Fair Value ($ thousands) | | :--- | :--- | :--- | | Held to maturity | | | | U.S. government sponsored enterprise MBS | $220,448 | $221,847 | | U.S. SBA securities | $1,858 | $1,874 | | Certificate of deposits | $1,000 | $1,000 | | Available for sale | | | | U.S. government agency MBS | $2,146 | $2,222 | | U.S. government sponsored enterprise MBS | $1,197 | $1,211 | | Private issue CMO | $151 | $154 | | Total | $226,800 | $228,308 | Note 3: Loans Held for Investment This note details the loan portfolio by risk category and provides an update on COVID-19 related loan forbearance status Loan Portfolio by Risk Category as of June 30, 2021 | Risk Category | Amount ($ thousands) | % of Total | | :--- | :--- | :--- | | Pass | $840,908 | 98.69% | | Special Mention | $1,767 | 0.21% | | Substandard | $9,407 | 1.10% | | Total | $852,082 | 100.00% | COVID-19 Loan Forbearance Status as of June 30, 2021 | Loan Type | Forbearance Granted (Amount) ($ thousands) | Forbearance Remaining (Amount) ($ thousands) | | :--- | :--- | :--- | | Single-family loans | $23,551,000 | $897,000 | | Multi-family loans | $2,321,000 | $0 | | Commercial real estate loans | $2,000,000 | $945,000 | | Total | $27,872,000 | $1,842,000 | - As of June 30, 2021, four loans with a total balance of $1.8 million remained in forbearance under the CARES Act. The company ceased offering new forbearance relief on March 31, 2021561564 Note 7: Deposits This note provides a breakdown of time deposit maturities as of June 30, 2021 Maturities of Time Deposits as of June 30, 2021 | Maturity Period | Amount ($ thousands) | | :--- | :--- | | One year or less | $76,705 | | Over one to two years | $37,687 | | Over two to five years | $25,646 | | Over five years | $399 | | Total | $140,437 | Note 12: Incentive Plans This note details the activity for stock options and restricted stock under the company's incentive plans for fiscal year 2021 Stock Option Activity (Fiscal Year 2021) | Activity | Shares | Weighted-Average Exercise Price | | :--- | :--- | :--- | | Outstanding at June 30, 2020 | 554,500 | $14.07 | | Exercised | (132,000) | $7.43 | | Forfeited | (5,500) | $10.68 | | Outstanding at June 30, 2021 | 417,000 | $16.22 | Restricted Stock Activity (Fiscal Year 2021) | Activity | Shares | Weighted-Average Award Date Fair Value | | :--- | :--- | :--- | | Unvested at June 30, 2020 | 225,500 | $18.55 | | Vested | (112,750) | $18.53 | | Forfeited | (11,500) | $18.57 | | Unvested at June 30, 2021 | 101,250 | $18.57 | Note 16: Fair Value of Financial Instruments This note provides a breakdown of assets measured at fair value on both a recurring and nonrecurring basis, categorized by fair value hierarchy levels Assets Measured at Fair Value on a Recurring Basis (June 30, 2021) | Asset Type | Level 1 ($ thousands) | Level 2 ($ thousands) | Level 3 ($ thousands) | Total ($ thousands) | | :--- | :--- | :--- | :--- | :--- | | Investment securities - available for sale | $0 | $3,433 | $154 | $3,587 | | Loans held for investment, at fair value | $0 | $0 | $1,874 | $1,874 | | Interest-only strips | $0 | $0 | $10 | $10 | | Total | $0 | $3,433 | $2,038 | $5,471 | Assets Measured at Fair Value on a Nonrecurring Basis (June 30, 2021) | Asset Type | Level 2 ($ thousands) | Level 3 ($ thousands) | Total ($ thousands) | | :--- | :--- | :--- | :--- | | Non-performing loans | $899 | $7,747 | $8,646 | | Mortgage servicing assets | $0 | $208 | $208 | | Total | $899 | $7,955 | $8,854 |