Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Safe-Harbor Statement
Certain matters discussed in this Form 10-K constitute “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:
● adverse economic conditions in our local market areas or other markets where we have lending relationships
● effects of employment levels, labor shortages, inflation, a recession or slowed economic growth;
● changes in the interest rate environment, including the past increases in the Federal Reserve benchmark rate and the duration of such increased levels, 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 inflation and the Federal Reserve monetary policy;
● the effects of any Federal government shutdown;
● credit risks of lending activities, including loan delinquencies, write-offs, changes in our ACL, and provision for credit losses;
● increased competitive pressures;
● quality and composition of our securities portfolio and the impact of adverse changes in the securities markets;
● quality and composition of our securities portfolio and the impact of adverse changes in the securities markets;
● fluctuations in deposits;
● secondary market conditions for loans and our ability to sell loans in the secondary market;
● liquidity issues, including our ability to borrow funds or raise additional capital, if necessary;
● expectations regarding key growth initiatives and strategic priorities;
● 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;
● results of examinations of us by regulatory authorities, which may the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or our bank subsidiary which could require us to increase our ACL, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings;
● 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;
● use of estimates in determining the fair value of assets, which may prove incorrect;
● disruptions or security breaches, or other adverse events, failures or interruptions in or attacks on our information technology systems or on the our third-party vendors;
● staffing fluctuations in response to product demand or corporate implementation strategies;
● our ability to pay dividends on our common stock;
● environmental, social and governance goals;
● effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, civil unrest and other external events;
● and other factors described in this Form 10-K and in 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 and on the SEC’s website at www.sec.gov .
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Forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking statements included in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur, and you should not put undue reliance on any forward-looking statements. These factors could cause our actual results for the fiscal 2025 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us and could negatively affect the Corporation’s consolidated financial condition and consolidated results of operations as well as its stock price performance.
General
Provident, a Delaware corporation, was organized in January 1996 for the purpose of becoming the holding company of the Bank upon the Bank’s conversion completed on June 27, 1996. Provident is regulated by the FRB. At June 30, 2024, the Corporation, on a consolidated basis, had total assets of $1.27 billion, total deposits of $888.3 million and total stockholders’ equity of $129.9 million. Provident has not engaged in any significant activity other than holding the stock of the Bank. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank and its subsidiaries.
The Bank, founded in 1956, is a federally chartered stock savings bank headquartered in Riverside, California. The Bank is regulated by the OCC, its primary federal regulator, and the FDIC, the insurer of its deposits. The Bank’s deposits are federally insured up to applicable limits by the FDIC. The Bank has been a member of the Federal Home Loan Bank 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 (generally land loans), 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 Southern and Northern California to be held for investment. 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 sell loans, competitive conditions, legislative and regulatory changes, fraud and other risks.
Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding the financial condition and results of operations of the Corporation. The information contained in this section should be read in conjunction with the audited Consolidated Financial Statements and accompanying selected Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.
Critical Accounting Estimates
The discussion and analysis of the Corporation’s financial condition and results of operations is based upon the Corporation’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make difficult, subjective or complex judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the consolidated financial statements and, therefore, management considers the following to be critical accounting estimates. These estimates involve a significant level of uncertainty at the time they are made, and changes in these estimates that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. Accordingly, actual results may differ from these estimates under different assumptions or conditions. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We have reviewed our critical accounting estimates with the audit committee of our Board of Directors. See Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a summary of significant accounting policies and the effect on our financial statements.
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Allowance for Credit Losses.
The ACL involves significant judgment and assumptions by management, which has a material impact on the carrying value of financial assets. The Corporation adopted ASC 326 using the prospective transition approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after July 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards.
As required by ASC 326, on July 1, 2023 the Corporation implemented CECL and recognized a $1.2 million one-time increase to its ACL, which was recorded directly to retained earnings. Under ASC 326 , the ACL is a valuation account that is deducted from the related loan’s amortized cost basis to present the net amount expected to be collected on the loans. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.
Management believes the ACL on loans held for investment is maintained at a level sufficient to provide for expected losses on the Corporation’s loans held for investment based on historical loss experience, current conditions, and reasonable and supportable forecasts. The provision for (recovery of) credit losses is charged (credited) against operations on a quarterly basis, as necessary, to maintain the ACL at appropriate levels. Future adjustments to the ACL may be necessary and results of operations could be significantly and adversely affected as a result of economic, operating, regulatory, and other conditions beyond the Corporation’s control.
Provision for Income Taxes. Management accounts for income taxes by estimating future tax effects of temporary differences between the tax and book basis of assets and liabilities considering the provisions of enacted tax laws. These differences result in deferred tax assets and liabilities, which are included in the Corporation’s Consolidated Statements of Financial Condition. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, management is required to make many subjective assumptions and judgments regarding the Corporation’s income tax exposures, including judgments in determining the amount and timing of recognition of the resulting deferred tax assets and liabilities, including projections of future taxable income. Interpretations of and guidance surrounding income tax laws and regulations change over time. As such, changes in management’s subjective assumptions and judgments can materially affect amounts recognized in the Consolidated Statements of Financial Condition and Consolidated Statements of Operations.
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, PFC. 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 Bank’s full service offices and investing those funds in single-family, multi-family and commercial real estate loans. Also, to a lesser extent, the Bank originates 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 plans to enhance its community banking business by moderately increasing its total assets, focusing on expanding single-family, multi-family, commercial real estate, construction, and commercial business loans. Additionally, the Corporation aims to reduce the percentage of retail time deposits in its deposit base while increasing the proportion of lower-cost checking and savings accounts. To diversify its deposit instruments, the Corporation will consider utilizing brokered certificates of deposit and the State of California’s time deposits, subject to market conditions and its funding
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needs. This strategy is designed to improve core revenue by achieving a higher net interest margin and, combined with the Corporation’s growth, ultimately increase net interest income. While the Corporation’s long-term strategy targets moderate growth, management acknowledges that this growth may be influenced by general economic conditions and other factors.
Investment services operations primarily consist of selling alternative investment products such as annuities and mutual funds to the Bank’s depositors. Investment services and trustee services contribute a very small percentage of gross revenue.
PFC 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.
There are a number of risks associated with the business activities of the Corporation, many of which are beyond the Corporation’s control, including: changes in accounting principles, laws, regulation, interest rates and the economy, among others. The Corporation attempts to mitigate many of these risks through prudent banking practices, such as interest rate risk management, credit risk management, operational risk management, and liquidity risk management. The 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. For further details on risk factors and uncertainties, see “Safe-Harbor Statement” included above in this Item 7, and Item 1A, "Risk Factors.”
Comparison of Financial Condition at June 30, 2024 and 2023
Total assets decreased $60.7 million, or 5%, to $1.27 billion at June 30, 2024 from $1.33 billion at June 30, 2023. The decrease was primarily attributable to decreases in loans held for investment, investment securities and cash and cash equivalents.
Total cash and cash equivalents, primarily excess cash deposited with the FRB of San Francisco, decreased $14.4 million, or 22%, to $51.4 million at June 30, 2024 from $65.8 million at June 30, 2023. The decrease was consistent with the Corporation’s strategy of adequately managing credit and liquidity risk.
Total investment securities (held to maturity and available for sale) decreased $24.6 million, or 16%, to $131.9 million at June 30, 2024 from $156.5 million at June 30, 2023. The decrease was the result of scheduled and accelerated principal payments on investment securities. During fiscal 2024 and 2023, the Bank did not purchase or sell any investment securities. For additional information on investment securities, see Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.
Loans held for investment, net decreased $24.7 million, or 2%, to $1.05 billion at June 30, 2024 from $1.08 billion at June 30, 2023. In fiscal 2024, the Bank originated $75.5 million of loans held for investment, down 68% from $237.1 million during fiscal 2023. In both years these loans consisted primarily of single-family, multi-family and commercial real estate loans. The Bank did not purchase any loans in fiscal 2024 or 2023. Management attributes the decrease in loan originations to the higher interest rate environment and overall uncertainty in the economy. Total loan principal payments in fiscal 2024 were $99.9 million, down 2% from $102.3 million in fiscal 2023. There was no REO in both fiscal 2024 and 2023. The balance of multi-family, commercial real estate, construction and commercial business loans, net of undisbursed loan funds, decreased $22.6 million, or 4%, to $532.6 million at June 30, 2024 from $555.2 million at June 30, 2023, and represented 51% and 52% of loans held for investment, respectively. The balance of single-family loans held for investment decreased slightly to $518.1 million at June 30, 2024, from $518.8 million at June 30, 2023. For additional information on loans held for investment, see Note 3 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.
FHLB – San Francisco and other equity investments increased $603,000, or 6%, to $10.1 million at June 30, 2024 from $9.5 million at June 30, 2023. The increase was due to a VISA stock conversion and the purchase of additional FHLB stock. In May 2024, the Bank converted its Class B1 VISA stock to Class B2 VISA stock and Class C VISA stock. Subsequently, the Bank recorded the Class C VISA stock at its fair value on its Consolidated Statements of Condition. As
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of June 30, 2024, the fair value of the Class C VISA stock was $540,000. The Bank also purchased $63,000 of required additional FHLB - San Francisco stock during the year.
Total deposits decreased $62.3 million, or 7%, to $888.3 million at June 30, 2024 from $950.6 million at June 30, 2023. Transaction accounts decreased $115.1 million, or 16%, to $614.5 million at June 30, 2024 from $729.6 million at June 30, 2023, while time deposits increased $53.0 million, or 24%, to $273.9 million at June 30, 2024 from $220.9 million at June 30, 2023. The increase in time deposits includes the increased utilization of brokered certificates of deposit. Brokered certificates of deposit increased $25.4 million, or 24%, to $131.8 million at June 30, 2024 from $106.4 million at June 30, 2023. As of June 30, 2024 and 2023, the percentage of transaction accounts to total deposits was 69% and 77%, respectively. Total retail deposits, defined as total deposits excluding brokered certificates of deposit, decreased by $87.7 million, or 10% to $756.5 million at June 30, 2024 from $844.2 million at June 30, 2023, due primarily to the decline of transaction account balances related to some customers seeking higher interest rates elsewhere. For additional information on deposits, see Note 6 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.
Borrowings, consisting of FHLB – San Francisco advances increased $3.5 million, or 1%, to $238.5 million at June 30, 2024 from $235.0 million at June 30, 2023. The increase was primarily due to new advances to augment the decrease in deposits. The weighted average maturity of the Corporation’s FHLB – San Francisco advances was approximately 13 months at June 30, 2024, up from 12 months at June 30, 2023. For additional information on borrowings, see Note 7 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.
Total stockholders’ equity increased slightly to $129.9 million at June 30, 2024 from $129.7 million at June 30, 2023, primarily as a result of net income and the amortization of stock-based compensation in fiscal 2024, partly offset by stock repurchases (see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Form 10-K) and quarterly cash dividends paid to shareholders.
Comparison of Operating Results for the Fiscal Years Ended June 30, 2024 and 2023
General. The Corporation recorded net income of $7.4 million, or $1.06 per diluted share, for the fiscal year ended June 30, 2024, down $1.2 million, or 14%, from $8.6 million, or $1.19 per diluted share, for the fiscal year ended June 30, 2023. The decrease in net income was primarily attributable to a $2.1 million decrease in net interest income, a $270,000 increase in non-interest expense and a $134,000 decrease in non-interest income, partly offset by a $437,000 change in the provision for credit losses resulting from a $63,000 recovery of credit losses recorded during fiscal 2024 compared to a $374,000 provision for credit losses during fiscal 2023. The Corporation's efficiency ratio, defined as non-interest expense divided by the sum of net interest income and non-interest income, increased to 73% in fiscal 2024 from 69% in fiscal 2023 due to both an increase in non-interest expenses and a decline in revenues. Return on average assets in fiscal 2024 decreased to 0.57% from 0.68% in fiscal 2023 and return on average stockholders' equity in fiscal 2024 decreased to 5.62% from 6.58% in fiscal 2023.
Net Interest Income. Net interest income decreased $2.1 million, or 6%, to $34.9 million in fiscal 2024 from $37.0 million in fiscal 2023. This decrease resulted from interest expense on interest-bearing liabilities increasing at a faster pace than interest income earned on interest-earning assets. Net interest margin decreased 21 basis points to 2.78% in fiscal 2024 from 2.99% in fiscal 2023, due to the decline in net interest income coupled with an increase in average interest earning assets. The average balance of interest-earning assets increased $18.6 million, or 2%, to $1.25 billion in fiscal 2024 from $1.24 billion in fiscal 2023. The average balance of interest-bearing liabilities increased $16.8 million, or 2%, to $1.13 billion during fiscal 2024 as compared to $1.12 billion during fiscal 2023.
Interest Income. Total interest income increased $8.7 million, or 19%, to $54.7 million for fiscal 2024 from $46.0 million for fiscal 2023. The increase was primarily attributable to an increase of interest income from loans receivable.
Interest income on loans receivable increased $8.0 million, or 19%, to $50.2 million in fiscal 2024 from $42.2 million in fiscal 2023. The increase was attributable to a higher average loan yield and, to a lesser extent, a higher average loan balance. The weighted average loan yield during fiscal 2024 increased 59 basis points to 4.69% from 4.10% in fiscal 2023,
reflecting new loans being originated at higher interest rates and adjustable rate loans repricing higher due to overall higher market interest rates resulting from the FOMC increases in the targeted federal funds rate during the latter half of fiscal
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2023. The average balance of loans receivable increased $40.6 million, or 4%, to $1.07 billion during fiscal 2024 from $1.03 billion during fiscal 2023.
Interest income on investment securities decreased $109,000, or 5%, to $2.1 million in fiscal 2024 from $2.2 million in fiscal 2023, due to a decrease in the average balance, partly offset by an increase in the average yield.. The average balance of investment securities decreased $27.5 million, or 16%, to $144.5 million in fiscal 2024 from $172.0 million in fiscal 2023 as a result of scheduled and accelerated principal payments on mortgage-backed securities. The average yield on investment securities increased 17 basis points to 1.43% for fiscal 2024 from 1.26% for fiscal 2023. The increase in the average yield of investment securities was primarily attributable to a lower premium amortization resulting from lower principal payments. Total premium amortization in fiscal 2024 was $532,000, down $259,000, or 33%, from $791,000 in fiscal 2023.
During fiscal 2024, the Bank received $802,000 of cash dividends from the FHLB - San Francisco and other equity investments, an increase of $246,000 or 44% from the $556,000 of cash dividends received in fiscal 2023, resulting in an average yield of 8.35% during fiscal 2024 compared to 6.55% during fiscal 2023.
Interest income on interest-earning deposits, primarily cash deposited at the FRB of San Francisco, increased $598,000, or 56%, to $1.7 million in fiscal 2024 from $1.1 million in fiscal 2023, due to a higher average yield and, to a lesser extent, a higher average balance. The average yield increased 133 basis points to 5.38% in fiscal 2024 from 4.05% in fiscal 2023, resulting from increases in the targeted federal funds interest rate since March 2022 to July 2023. The average balance of interest-earning deposits increased $4.4 million, or 17%, to $30.6 million in fiscal 2024 from $26.2 million in fiscal 2023.
Interest Expense. Total interest expense for fiscal 2024 was $19.8 million compared to $9.0 million for fiscal 2023, an increase of $10.8 million or 120%. This increase was primarily attributable to a higher interest expense on deposits, particularly time deposits and, to a lesser extent, a higher interest expense on borrowings. The average cost of interest-bearing liabilities was 1.74% during fiscal 2024, up 94 basis points from 0.80% during fiscal 2023, and the average balance of interest-bearing liabilities was $1.14 billion during fiscal 2024, up $16.8 million or 2% from $1.12 billion during fiscal 2023.
Interest expense on deposits for fiscal 2024 was $9.7 million compared to $3.1 million for fiscal 2023, an increase of $6.6 million or 213%. The increase was primarily attributable to a higher average cost for time deposits and, to a lesser extent, a higher average balance of such deposit. The average cost of time deposits in fiscal 2024 was 3.66%, up 196 basis points, from 1.70% in fiscal 2023, while the average cost of transaction accounts was 0.09% in fiscal 2024, up four basis points from 0.05% in fiscal 2023. The average cost of all deposits increased 73 basis points to 1.06% in fiscal 2024 from 0.33% in fiscal 2023. The average balance of time deposits increased $85.8 million, or 53%, to $247.9 million in fiscal 2024 from $162.1 million in fiscal 2023, which as partly offset a decrease in the average balance of transaction accounts which decreased $130.5 million, or 16%, to $668 2 million in fiscal 2024 from $798.7 million in fiscal 2023. The increase of time deposits included increased brokered certificates of deposit. The average balance of brokered certificates of deposit in fiscal 2024 was $118.8 million with the average cost of 5.17% compared to the average balance of $48.7 million with the average cost of 3.97% in fiscal 2023.
Interest expense on borrowings, consisting of FHLB - San Francisco advances, for fiscal 2024 increased $4.2 million, or 71%, to $10.1 million as compared to $5.9 million in fiscal 2023. The increase in interest expense on borrowings was due to a higher average balance and, to a lesser extent, a higher average cost. The average balance of borrowings increased $61.7 million, or 39%, to $221.4 million during fiscal 2024 from $159.7 million during fiscal 2023 and the average cost of borrowings was 4.58% in fiscal 2024, up 91 basis points from 3.67% in fiscal 2023.
Provision for (Recovery of) Credit Losses. During fiscal 2024, the Corporation recorded a recovery of credit losses of $63,000, compared to a provision for credit losses of $374,000 during fiscal 2023. The recovery of credit losses reflected in fiscal 2024 was primarily due to a $23.5 million decrease in loans held for investment at June 30, 2024 from June 30, 2023 and a slightly shorter estimated life of the single-family loan portfolio resulting from higher loan prepayment estimates, partly offset by higher unfunded loan commitments resulting from a higher outstanding balance at June 30, 2024 as compared to the prior fiscal year end. The provision for credit losses in fiscal 2023 was primarily due to a higher outstanding balance of loans held for investment.
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At June 30, 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% from $5.9 million at June 30, 2023. The ACL on loans as a percentage of gross loans held for investment was 0.67% at June 30, 2024, compared to 0.55% 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 fiscal 2024 ($63,000, net of a $15,000 provision for unfunded loan commitment reserves). The ACL on loans as a percentage of gross loans held for investment was 0.67% at June 30, 2024, compared to 0.55% at June 30, 2023.
The following chart quantifies the factors contributing to the changes in the ACL on loans held for investment (“LHFI”) for the year ended June 30, 2024 subsequent to the adoption of the CECL methodology on July 1, 2023.
Management believes, based on currently available information, the ACL is sufficient to absorb expected losses inherent in loans held for investment at June 30, 2024 under the CECL methodology adopted since July 1, 2023. For additional information, see Item 1, “Business - “Asset Quality” in this Form 10-K.
Non-Interest Income. Total non-interest income was $3.9 million in fiscal 2024, a decrease of $134,000 or 3% from $4.1 million in fiscal 2023.
Loan servicing and other fees decreased $77,000, or 19%, to $337,000 for fiscal 2024 from $414,000 in fiscal 2023, due primarily to lower loan prepayment fees, attributable to lower loan payoffs.
Deposit account fees decreased $142,000, or 11%, to $1.2 million for fiscal 2024 from $1.3 million in fiscal 2023, due primarily to lower non-sufficient funds account fees, attributable to lower transactions and lower transaction account balances.
Card and processing fees decreased $141,000, or 9%, to $1.4 million for fiscal 2024 from $1.5 million in fiscal 2023, due primarily to lower debit card transactions.
Other fees increased $226,000, or 27%, to $1.1 million for fiscal 2024 from $840,000 in fiscal 2023, due primarily to a $540,000 net unrealized gain on other equity investments resulting from the VISA share conversion, partly offset by a net change of $190,000 on the losses on sale of loans (a net loss of $64,000 on sale of loans in fiscal 2024 compared to a net gain of $124,000 on sale of loans in the prior fiscal year). In May 2024, the Bank converted its VISA Class B1 shares into VISA Class B2 shares and VISA Class C shares and recorded the VISA Class C shares at fair value subsequent to the conversion.
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Non-Interest Expense. Total non-interest expense was $28.5 million in fiscal 2024, an increase of $270,000 or 1% from $28.3 million in fiscal 2023. The increase in non-interest expense was primarily attributable to increases in premises and occupancy expenses, equipment expense, deposit insurance premiums and regulatory assessments, partly offset by decreases in salaries and employee benefits and other operating expenses.
Salaries and employee benefits expense decreased $95,000, or 1%, to $17.6 million in fiscal 2024 from $17.7 million in fiscal 2023. The decrease in salaries and employee benefits expense was primarily attributable to a decrease in incentive compensation, partly offset by increases in the supplemental executive retirement plans and compensation costs.
Premises and occupancy expense increased $139,000, or 4%, to $3.6 million in fiscal 2024 from $3.4 million in fiscal 2023. The increase was primarily attributable to increases in building maintenance and fixture depreciation costs, resulting primarily from the relocation of one of our banking offices and ATM upgrades, partly offset by lower on-line service expenses.
Equipment expense increased $157,000, or 14%, to $1.3 million in fiscal 2024 from $1.2 million in fiscal 2023, due primarily to the upgrades of computer hardware and software and an increase of equipment lease expenses.
Deposit insurance premiums and regulatory assessments increased $123,000, or 19%, to $780,000 in fiscal 2024 from $657,000 in fiscal 2023, primarily attributable to the increase in FDIC insurance assessments.
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 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.
The provision for income taxes was $3.0 million for fiscal 2024, representing an effective tax rate of 29.2%, down $788,000 or 21% from $3.8 million in fiscal 2023, representing an effective tax rate of 30.8%. The lower effective tax rate in fiscal 2024 was attributable primarily to the decreased tax benefit in fiscal 2023 from the equity incentive awards with the share price lower at vesting and distribution than the fair value estimated at the grant date, which was not replicated in fiscal 2024.
The Corporation’s effective tax rate may differ from the estimated tax rates described above due to discrete items such as further adjustments to net deferred tax assets, excess tax benefits derived from stock option exercises and non-taxable earnings from bank owned life insurance, among other items. The Corporation determined that the above tax rates meet its estimated income tax obligations. For additional information, see Note 8, "Income Taxes," of the Notes to Consolidated Financial Statements, contained in Item 8 of this Form 10-K.
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Average Balances, Interest and Average Yields/Costs
The following table sets forth certain information for the periods regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs thereof. Yields and costs for the periods indicated are derived by dividing income or expense by the average monthly balance of assets or liabilities, respectively, for the periods presented.
Year Ended June 30,
2024
2023
Average
Yield/
Average
Yield/
(Dollars In Thousands)
Balance
Interest
Cost
Balance
Interest
Cost
Interest-earning assets:
Loans receivable, net (1)
$
1,069,616
$
50,194
4.69
%
$
1,029,000
$
42,191
4.10
%
Investment securities
144,466
2,060
1.43
%
172,005
2,169
1.26
%
FHLB - San Francisco and other equity investments
9,601
802
8.35
%
8,488
556
6.55
%
Interest-earning deposits
30,610
1,674
5.38
%
26,214
1,076
4.05
%
Total interest-earning assets
1,254,293
54,730
4.36
%
1,235,707
45,992
3.72
%
Noninterest-earning assets
30,655
32,763
Total assets
$
1,284,948
$
1,268,470
Interest-bearing liabilities:
Checking and money market accounts (2)
$
407,938
290
0.07
%
$
479,921
227
0.05
%
Savings accounts
260,249
313
0.12
%
318,795
168
0.05
%
Time deposits
247,863
9,063
3.66
%
162,144
2,751
1.70
%
Total deposits (3)
916,050
9,666
1.06
%
960,860
3,146
0.33
%
Borrowings
221,368
10,141
4.58
%
159,742
5,861
3.67
%
Total interest-bearing liabilities
1,137,418
19,807
1.74
%
1,120,602
9,007
0.80
%
Noninterest-bearing liabilities
16,731
17,307
Total liabilities
1,154,149
1,137,909
Stockholders’ equity
130,799
130,561
Total liabilities and stockholders’ equity
$
1,284,948
$
1,268,470
Net interest income
$
34,923
$
36,985
Interest rate spread (4)
2.62
%
2.92
%
Net interest margin (5)
2.78
%
2.99
%
Ratio of average interest- earning assets to average interest-bearing liabilities
110.28
%
110.27
%
(1) Includes the average balance of non-performing loans of $2.1 million and $1.1 million, as well as net deferred loan costs of $955 thousand and $959 thousand for the fiscal years ended June 30, 2024 and 2023, respectively.
(2) Includes the average balance of noninterest-bearing checking accounts of $97.3 million and $112.9 million in the fiscal years ended June 30, 2024 and 2023, respectively.
(3) Includes the average balance of uninsured deposits of $135.7 million and $170.2 million in the fiscal years ended June 30, 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 as a percentage of average interest-earning assets.
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Rate/Volume Variance
The following table sets forth the effects of changing rates and volumes on interest income and expense of the Corporation for the period presented. Information is provided with respect to the effects attributable to changes in volume (changes in volume multiplied by prior rate), the effects attributable to changes in rate (changes in rate multiplied by prior volume) and the effects attributable to changes that cannot be allocated between rate and volume.
Year Ended June 30, 2024 Compared
To Year Ended June 30, 2023
Increase (Decrease) Due to
(In Thousands)
Rate
Volume
Rate/Volume
Net
Interest-earning assets:
Loans receivable (1)
$
6,098
$
1,665
$
240
$
8,003
Investment securities
285
(347)
(47)
(109)
FHLB – San Francisco and other equity investments
153
73
20
246
Interest-bearing deposits
362
178
58
598
Total net change in income on interest-earning assets
6,898
1,569
271
8,738
Interest-bearing liabilities:
Checking and money market accounts
113
(36)
(14)
63
Savings accounts
215
(29)
(41)
145
Time deposits
3,175
1,457
1,680
6,312
Borrowings
1,457
2,262
561
4,280
Total net change in expense on interest-bearing liabilities
4,960
3,654
2,186
10,800
Net increase (decrease) in net interest income
$
1,938
$
(2,085)
$
(1,915)
$
(2,062)
(1) Includes non-performing loans. For purposes of calculating volume, rate and rate/volume variances, non-performing loans were included in the weighted average balance outstanding.
Liquidity and Capital Resources
The Bank’s primary sources of funds are deposits, proceeds from principal and interest payments on loans, proceeds from the maturity and sale of investment securities, proceeds from FHLB - San Francisco advances, access to the discount window facility at the FRB of San Francisco and access to the correspondent bank’s federal funds facility. While maturities and scheduled amortization of loans and investment securities are a relatively predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
The primary investing activity of the Bank has been the origination and, to a lesser extent, purchase of loans held for investment. During the fiscal years ended June 30, 2024 and 2023, the Bank originated loans held for investment of $75.5 million and $237.1 million, respectively. The Bank did not purchase any loans held for investment from other financial institutions in fiscal 2024 or 2023. At June 30, 2024 and 2023, the Bank had loan origination commitments totaling $9.4 million and $2.4 million, with undisbursed loan funds of $435,000 and $2.0 million, respectively. The Bank anticipates that it will have sufficient funds available to meet its current loan origination commitments.
The Bank's primary financing activity is gathering deposits, which include both retail and brokered deposits. During the fiscal years ended June 30, 2024 and 2023, the net decrease in deposits was $62.2 million and $4.9 million, respectively. On June 30, 2024, time deposits scheduled to mature in one year or less were $245.7 million. Historically, the Bank has been able to retain a significant percentage of its time deposits as they mature by adjusting deposit rates based upon the current interest rate environment.
The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities. The Bank generally maintains sufficient cash and cash equivalents to meet short-term liquidity needs. At June 30, 2024, total cash and cash equivalents were $51.4 million, or 4.0% of total assets. Depending on market conditions and the pricing of deposit products and FHLB - San Francisco advances, the Bank may continue to rely on FHLB - San Francisco advances for part
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of its liquidity needs. As of June 30, 2024, the remaining financing availability at the FHLB - San Francisco was $261.3 million and the remaining available collateral was $367.4 million. In addition, the Bank has secured a $208.6 million discount window facility at the FRB of San Francisco, collateralized by $126.6 million of investment securities and $178.6 million of loans held for investment. The Bank also has a federal funds facility with its correspondent bank for $50.0 million which matures on June 30, 2025. As of June 30, 2024, there were no outstanding borrowings under the discount window facility or the federal funds facility with its correspondent bank. The total available borrowing capacity across all sources totals approximately $519.9 million at June 30, 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 June 30, 2024 decreased to 16.6% from 18.1% during the same quarter ended June 30, 2023. The decrease in the liquidity ratio was due primarily to the decrease in average qualifying liquid assets which exceeded the decrease in average deposits and borrowings during the quarter ended June 30, 2024 in comparison to the quarter ended June 30, 2023. The Bank augments its liquidity by maintaining sufficient borrowing capacity at the FHLB - San Francisco, FRB of San Francisco and its correspondent bank.
We incur capital expenditures on an ongoing basis to expand and improve our product offerings, enhance and modernize our technology infrastructure, and to introduce new technology-based products to compete effectively in our markets. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment. The amount of capital investment is influenced by, among other things, current and projected demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations.
Based on our current capital allocation objectives, during fiscal 2025 we project expenditures of ranging from $270,000 to $1.5 million for capital investment in premises and equipment. For additional information regarding our commitments, see Note 13, "Commitments and Contingencies," of the Notes to Consolidated Financial Statements, contained in Item 8 of this Form 10-K.
Provident 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, cash dividends and stock repurchases. Provident’s 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. During fiscal 2024, the Corporation purchased 197,349 shares of the Corporation’s common stock with a weighted average cost of $13.05 per share. As of June 30, 2024, there are 189,116 shares available for purchase under the Corporation’s existing stock repurchase plan. 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. In addition, 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 substantial portion of our cash to our shareholders. Assuming continued payment during fiscal 2025 at this rate of $0.14 per share, our average total dividend paid each quarter would be approximately $959,000 based on the number of our current outstanding shares as of June 30, 2024. At June 30, 2024, Provident (on an unconsolidated basis) had liquid assets of approximately $3.4 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. In addition, Provident Financial Holdings, Inc., as a savings and loan holding company registered with the FRB, is required by the FRB to maintain capital adequacy that generally parallels the OCC requirements. Since the holding company has less than $3.0 billion in assets, the capital guidelines apply on a bank only basis, and the FRB expects the holding company’s subsidiary bank to be well capitalized under the prompt corrective action regulations.
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At June 30, 2024, the Bank exceeded all regulatory capital requirements. Under the prompt corrective action provisions, minimum ratios of 5.0% for Tier 1 Leverage Capital, 6.5% for CET1 Capital, 8.0% for Tier 1 Risk-based Capital and 10.0% for Total Risk-based Capital are required to be deemed “well capitalized.” As of June 30, 2024, the Bank exceeded the capital ratios needed to be considered well capitalized with Tier 1 Leverage Capital, CET1 Capital, Tier 1 Risk-based Capital and Total Risk-based Capital ratios of 10.0%, 19.3%, 19.3% and 20.4%, respectively. See also, “Regulation – Federal Regulation of Savings Institutions – Capital Requirements” and Note 9, "Capital" of the Notes to Consolidated Financial Statements contained in Items 1 and 8 of this Form 10-K, respectively.
Impact of New Accounting Pronouncements
Various elements of the Corporation's accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, as a result of the judgments, estimates and assumptions inherent in those policies, are important to gain an understanding of the financial statements of the Corporation. These policies relate to the methodology for the recognition of interest income, determination of the provision for credit losses and the ACL, the estimated fair value of derivative financial instruments, the valuation of mortgage servicing assets and real estate owned and the provision for income taxes. These policies and judgments, estimates and assumptions are described in greater detail in this Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the section entitled “Organization and Summary of Significant Accounting Policies” contained in Note 1 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. Management believes that the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate based on the factual circumstances at the time. However, because of the sensitivity of the financial statements to these accounting policies, changes to the judgments, estimates and assumptions used could result in material differences in the results of operations or financial condition.