EX-13 2 prov-2018630x10kxex13.htm EXHIBIT 13
EXHIBIT 13
2018 Annual Report to Stockholders

2018 Annual Report

Message From the Chairman
Dear Shareholders:
I am pleased to forward our Annual Report for fiscal 2018. A year where we have met and resolved significant challenges, and also a year where we have continued to work on better positioning the Company to improve on our financial results by capitalizing on better general economic conditions through high quality growth in the community banking segment while simultaneously adjusting our mortgage banking business to compensate for the challenging mortgage banking environment.
Overall, our fiscal 2018 financial results, net income of $2.1 million or $0.28 per share, were lower than last year but were adversely affected by non-recurring expenses associated with the settlements of certain legal matters and the revaluation of net deferred tax assets consistent with the Tax Cuts and Jobs Act. Additionally, we made significant changes to our mortgage banking business model, closing a few loan production offices and adjusting the staffing levels to more closely align origination capacity and cost structure to lower demand for mortgages.
The fiscal 2018 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, consistent with changes in market opportunities and to complete the implementation of our new loan operating system.
I am pleased to report that we have made progress in these areas. For Provident Bank, loan originations and purchases for the held for investment portfolio were $199.9 million in fiscal 2018, unfortunately the loan origination volume was more than offset by loan prepayments, which were higher in fiscal 2018 than last year. The core deposits balance increased by $11.3 million or two percent at June 30, 2018 from the same date last year and represents 74 percent of total deposits; operating expenses for fiscal 2018 decreased by three percent from the prior year (after adjusting for the non-recurring litigation settlement expenses); and finally, we paid a quarterly cash dividend of $0.14 per share in fiscal 2018 while repurchasing approximately 384,000 shares of our common stock.
Also, in fiscal 2018, Provident Bank Mortgage originated approximately $1.2 billion of loans held for sale, a decline of approximately 38 percent from fiscal 2017, with 62 percent originated for purchase money transactions and 38 percent originated for refinance transactions. Provident Bank Mortgage also originated $85.1 million of loans held for investment in fiscal 2018, an 11 percent increase from the $76.5 million originated for investment last year. Additionally, operating expenses in our mortgage banking business declined by 22 percent from the prior year (after adjusting for the non-recurring litigation settlement expenses), and demonstrates our commitment to adjusting the business model in relation to mortgage market opportunities. Lastly, we completed the implementation of our new loan operating system in the retail channel and will have the implementation completed in the wholesale channel by the end of the first quarter of fiscal 2019. Unfortunately though, the substantial adjustments we made to the mortgage banking business model were insufficient to overcome the significantly lower loan origination volume resulting in an unprofitable year for mortgage banking.
Provident Bank in fiscal 2019
Similar to this year, we plan to emphasize disciplined growth in loans held for investment (we will not pursue growth at any cost); the growth of core deposits; diligent control of operating expenses; and sound capital management decisions. To the extent our opportunities are limited by overly aggressive competitors, we will return capital to shareholders in the form of cash dividends and common stock repurchases. We believe that successful execution of these strategies will enhance our franchise value while keeping our risk profile within acceptable levels.
Provident Bank Mortgage in fiscal 2019
We will continue to adjust our mortgage banking business model to current market conditions. During the course of fiscal 2018, we closed three mortgage banking loan production offices and reduced the total number of mortgage banking personnel from the end of the prior year by approximately 32 percent. In fiscal 2019, we plan to: further change our product offerings commensurate with the shifting market; continue our focus on purchase money originations versus refinance originations; make changes to our operating expenses consistent with market opportunities; and complete the implementation of our new loan operating system.
A Final Word
I am encouraged by general economic conditions and the current banking environment. As a result, I am excited to begin the Company’s new fiscal year. We can look forward to full implementation of the tax cuts (for those of us on a fiscal year), easing regulatory pressures and solid credit quality. We have a healthy economy resulting in job and wage growth and Provident is exceptionally well-capitalized giving us the ability to execute on our business plan and capital management goals. Of course, we will still have our share of challenges to face but we have repeatedly demonstrated our ability to overcome obstacles. Doing so,

has resulted in our becoming the largest community bank headquartered in Riverside County.
In closing, I wish to recognize our staff of banking professionals and the Board of Directors for their endless commitment and dedication; the exceptional loyalty of our customers in the communities we serve; and the steadfast support of our shareholders. We recognize that our long-term success is inextricably linked to each of you. Thank you.
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) |  | 2018 |  | 2017 |  | 2016 |  | 2015 |  | 2014
FINANCIAL CONDITION DATA: |  |  |  |  |  |  |  |  |  |
Total assets |  | $ | 1,175,549 |  |  | $ | 1,200,633 |  |  | $ | 1,171,381 |  |  | $ | 1,174,555 |  |  | $ | 1,105,629 |
Loans held for investment, net |  | 902,685 |  |  | 904,919 |  |  | 840,022 |  |  | 814,234 |  |  | 772,141 |
Loans held for sale, at fair value |  | 96,298 |  |  | 116,548 |  |  | 189,458 |  |  | 224,715 |  |  | 158,883 |
Cash and cash equivalents |  | 43,301 |  |  | 72,826 |  |  | 51,206 |  |  | 81,403 |  |  | 118,937 |
Investment securities |  | 95,309 |  |  | 69,759 |  |  | 51,522 |  |  | 14,961 |  |  | 17,147 |
Deposits |  | 907,598 |  |  | 926,521 |  |  | 926,384 |  |  | 924,086 |  |  | 897,870 |
Borrowings |  | 126,163 |  |  | 126,226 |  |  | 91,299 |  |  | 91,367 |  |  | 41,431 |
Stockholders’ equity |  | 120,457 |  |  | 128,230 |  |  | 133,451 |  |  | 141,137 |  |  | 145,862 |
Book value per share |  | 16.23 |  |  | 16.62 |  |  | 16.73 |  |  | 16.35 |  |  | 15.66 |
OPERATING DATA: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest income |  | $ | 42,712 |  |  | $ | 42,417 |  |  | $ | 39,304 |  |  | $ | 39,696 |  |  | $ | 38,059 |
Interest expense |  | 6,412 |  |  | 6,679 |  |  | 6,975 |  |  | 6,421 |  |  | 7,336 |
Net interest income |  | 36,300 |  |  | 35,738 |  |  | 32,329 |  |  | 33,275 |  |  | 30,723 |
Recovery from the allowance for loan losses |  | (536 | ) |  | (1,042 | ) |  | (1,715 | ) |  | (1,387 | ) |  | (3,380 | )
Net interest income after recovery from the allowance for loan losses |  | 36,836 |  |  | 36,780 |  |  | 34,044 |  |  | 34,662 |  |  | 34,103 |
Loan servicing and other fees |  | 1,575 |  |  | 1,251 |  |  | 1,068 |  |  | 1,085 |  |  | 1,077 |
Gain on sale of loans, net |  | 15,802 |  |  | 25,680 |  |  | 31,521 |  |  | 34,210 |  |  | 25,799 |
Deposit account fees |  | 2,119 |  |  | 2,194 |  |  | 2,319 |  |  | 2,412 |  |  | 2,469 |
(Loss) gain on sale and operations of real estate owned acquired in the settlement of loans, net |  | (86 | ) |  | (557 | ) |  | (95 | ) |  | 282 |  |  | 18 |
Card and processing fees |  | 1,541 |  |  | 1,451 |  |  | 1,448 |  |  | 1,406 |  |  | 1,370 |
Other non-interest income |  | 944 |  |  | 802 |  |  | 800 |  |  | 992 |  |  | 942 |
Operating expenses |  | 53,204 |  |  | 58,785 |  |  | 58,259 |  |  | 57,969 |  |  | 54,168 |
Income before income taxes |  | 5,527 |  |  | 8,816 |  |  | 12,846 |  |  | 17,080 |  |  | 11,610 |
Provision for income taxes |  | 3,396 |  |  | 3,609 |  |  | 5,372 |  |  | 7,277 |  |  | 5,004 |
Net income |  | $ | 2,131 |  |  | $ | 5,207 |  |  | $ | 7,474 |  |  | $ | 9,803 |  |  | $ | 6,606 |
Basic earnings per share |  | $ | 0.28 |  |  | $ | 0.66 |  |  | $ | 0.90 |  |  | $ | 1.09 |  |  | $ | 0.67 |
Diluted earnings per share |  | $ | 0.28 |  |  | $ | 0.64 |  |  | $ | 0.88 |  |  | $ | 1.07 |  |  | $ | 0.65 |
Cash dividend per share |  | $ | 0.56 |  |  | $ | 0.52 |  |  | $ | 0.48 |  |  | $ | 0.45 |  |  | $ | 0.40 |

Financial Highlights

|  | At or For The Year Ended June 30,
|  | 2018 |  | 2017 |  | 2016 |  | 2015 |  | 2014
KEY OPERATING RATIOS: |  |  |  |  |  |  |  |  |  |
Performance Ratios |  |  |  |  |  |  |  |  |  |
Return on average assets |  | 0.18 | % |  | 0.43 | % |  | 0.64 | % |  | 0.87 | % |  | 0.58 | %
Return on average stockholders’ equity |  | 1.73 |  |  | 3.94 |  |  | 5.43 |  |  | 6.81 |  |  | 4.31 |
Interest rate spread |  | 3.13 |  |  | 3.00 |  |  | 2.78 |  |  | 2.96 |  |  | 2.69 |
Net interest margin |  | 3.19 |  |  | 3.06 |  |  | 2.85 |  |  | 3.03 |  |  | 2.79 |
Average interest-earning assets to average interest-bearing liabilities |  | 110.66 |  |  | 111.16 |  |  | 111.75 |  |  | 113.02 |  |  | 113.54 |
Operating and administrative expenses as a percentage of average total assets |  | 4.54 |  |  | 4.90 |  |  | 4.98 |  |  | 5.12 |  |  | 4.75 |
Efficiency ratio(1) |  | 91.42 |  |  | 88.32 |  |  | 83.96 |  |  | 78.70 |  |  | 86.81 |
Stockholders’ equity to total assets ratio |  | 10.25 |  |  | 10.68 |  |  | 11.39 |  |  | 12.02 |  |  | 13.19 |
Dividend payout ratio |  | 200.00 |  |  | 81.25 |  |  | 54.55 |  |  | 42.06 |  |  | 61.54 |
The Corporation's Regulatory Capital Ratios(2) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Tier 1 leverage capital (to adjusted average assets) |  | 10.29 | % |  | 10.77 | % |  | 11.40 | % |  | 11.94 | % |  | N/A
CET1 capital (to risk-weighted assets) |  | 17.37 |  |  | 17.57 |  |  | 17.89 |  |  | 19.24 |  |  | N/A
Tier 1 capital (to risk-weighted assets) |  | 17.37 |  |  | 17.57 |  |  | 17.89 |  |  | 19.24 |  |  | N/A
Total capital (to risk-weighted assets) |  | 18.46 |  |  | 18.71 |  |  | 19.09 |  |  | 20.49 |  |  | N/A
The Bank's Regulatory Capital Ratios(2) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Tier 1 leverage capital (to adjusted average assets) |  | 9.96 | % |  | 9.90 | % |  | 10.29 | % |  | 10.68 | % |  | 12.53 | %
CET1 capital (to risk-weighted assets) |  | 16.81 |  |  | 16.14 |  |  | 16.16 |  |  | 17.22 |  |  | N/A
Tier 1 capital (to risk-weighted assets) |  | 16.81 |  |  | 16.14 |  |  | 16.16 |  |  | 17.22 |  |  | 18.72 |
Total capital (to risk-weighted assets) |  | 17.90 |  |  | 17.28 |  |  | 17.36 |  |  | 18.47 |  |  | 19.98 |
Asset Quality Ratios |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-performing loans as a percentage of loans held for investment, net |  | 0.67 | % |  | 0.88 | % |  | 1.23 | % |  | 1.71 | % |  | 2.06 | %
Non-performing assets as a percentage of total assets |  | 0.59 |  |  | 0.80 |  |  | 1.11 |  |  | 1.39 |  |  | 1.66 |
Allowance for loan losses as a percentage of gross loans held for investment |  | 0.81 |  |  | 0.88 |  |  | 1.02 |  |  | 1.06 |  |  | 1.25 |
Net charge-offs (recoveries) to average loans receivable, net |  | 0.01 |  |  | (0.04 | ) |  | (0.17 | ) |  | (0.04 | ) |  | 0.21 |

(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 Tuesday, November 27, 2018 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 1000
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 |  | Deborah L. Hill
|  | Senior Vice President
Debbi H. Guthrie |  | Chief Human Resources and
Retired Executive |  | Administrative Officer
Raincross Hospitality Corporation |  |
|  | Robert "Scott" Ritter
Roy H. Taylor |  | Senior Vice President
Retired Executive |  | Provident Bank Mortgage
Hub International of California, Inc. |  |
|  | Lilian Salter
William E. Thomas, Esq. |  | Senior Vice President
Executive Vice President and General Counsel |  | Chief Information Officer
The KPC Group |  |
|  | Donavon P. Ternes
|  | 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 110
Riverside, CA 92507 |  | Rancho Cucamonga, CA 91730
Corona |  |
487 Magnolia Avenue, Suite 101 |  | RETAIL MORTGAGE OFFICES
Corona, CA 92879 |  |
|  | Atascadero
Downtown Business Center |  | 7480 El Camino Real, 2nd Floor
4001 Main Street |  | Atascadero, CA 93422
Riverside, CA 92501 |  |
|  | Brea
Hemet |  | 3010 Saturn Street, Suite 101
1690 E. Florida Avenue |  | Brea, CA 92821
Hemet, CA 92544 |  |
|  | Escondido
Home Office |  | 221 West Crest Street, Suite 100
6570 Magnolia Avenue |  | Escondido, CA 92025
Riverside, CA 92506 |  |
|  | Glendora
La Quinta |  | 1200 East Route 66, Suite 102
78752 Highway 111 |  | Glendora, CA 91740
La Quinta, CA 92253 |  |
|  | Rancho Cucamonga
La Sierra |  | 10370 Commerce Center Drive, Suite 110
3312 La Sierra Avenue, Suite 105 |  | Rancho Cucamonga, CA 91730
Riverside, CA 92503 |  |
|  | Riverside, Canyon Crest Drive
Moreno Valley |  | 5225 Canyon Crest Drive, Suite 86
12460 Heacock Street |  | Riverside, CA 92507
Moreno Valley, CA 92553 |  |
|  | Riverside, Indiana Avenue
Orangecrest |  | 7111 Indiana Avenue, Suite 200
19348 Van Buren Boulevard, Suite 119 |  | Riverside, CA 92504
Riverside, CA 92508 |  |

|  | Riverside, Riverside Avenue
Rancho Mirage |  | 6529 Riverside Avenue, Suite 160
71991 Highway 111 |  | Riverside, CA 92506
Ranch Mirage, CA 92270 |  |
|  | Roseville
Redlands |  | 2998 Douglas Boulevard, Suite 115
125 E. Citrus Avenue |  | Roseville, CA 95661
Redlands, CA 92373 |  |
Sun City |  |
27010 Sun City Boulevard |  |
Sun City, CA 92586 |  |
Temecula |  |
40705 Winchester Road, Suite 6 |  |
Temecula, CA 92591 |  |
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