Provident Financial Holdings, Inc. — Q2 FY2013 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2012. The company operates community banking and mortgage banking businesses, primarily in Southern California. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 FY2013 / Dec. 31, 2012 | Comparable period / change |
|---|---|---|
| Net income | $6.94 | $1.85 in Q2 FY2012; up 263% |
| Diluted EPS | $0.64 | $0.16 in Q2 FY2012 |
| Six-month net income / diluted EPS | $15.67 / $1.43 | $4.17 / $0.36 in prior-year period |
| Net interest income, before loan-loss provision | $8.77 for quarter; $17.71 for six months | Down 8% and 3%, respectively |
| Net interest margin | 2.90% quarterly; 2.93% six-month | Down 12 bps quarterly; up 3 bps six-month |
| Loan-loss provision | $0.02 quarterly; $0.56 for six months | Versus $1.13 and $2.10, respectively |
| Non-interest income | $20.04 quarterly; $42.19 for six months | Up 174% and 165%, largely from loan-sale gains |
| Non-interest expense | $16.77 quarterly; $34.10 for six months | Up 34% and 38%; compensation was the main increase |
| Efficiency ratio | 58% quarterly; 57% for six months | 74% and 73% in prior-year periods |
Loan-sale gains were $17.88 for the quarter and $38.47 for six months. Mortgage loan sales were $1.01 billion quarterly and $1.80 billion for six months; reported gains benefited from higher sale volumes and margins. Community banking net income was $1.85 for the quarter, while mortgage banking contributed $5.09.
At December 31, total assets were $1.248 billion, down $12.6 million from June 30. Cash and equivalents were $99.6 million, down $45.5 million; loans held for investment, net, were $772.1 million, down $24.8 million; and loans held for sale were $294.4 million, up $62.8 million. Deposits totaled $935.2 million, down $26.2 million, and FHLB borrowings were $126.5 million, essentially unchanged. Stockholders’ equity was $155.9 million, up $11.1 million.
Six-month cash flows were $47.1 million used in operating activities, $32.6 million provided by investing activities, and $31.0 million used in financing activities. Cash declined $45.5 million to $99.6 million. The filing attributes much of operating cash use to mortgage-loan origination and sale timing. Bank regulatory capital exceeded “well capitalized” thresholds: Tier 1 leverage 12.26%, Tier 1 risk-based 18.79%, and total risk-based 20.05%. The Bank’s remaining FHLB borrowing capacity was $305.6 million; its $18.6 million Federal Reserve discount-window facility was unused.
Material changes and asset quality
- Quarterly earnings rose sharply, primarily because mortgage banking gains increased and the loan-loss provision fell; net interest income before provision declined and operating expenses rose.
- Non-performing loans, net of allowance, fell to $24.4 million from $34.5 million at June 30; non-performing assets declined to $26.8 million from $40.0 million. The allowance was $18.5 million, or 2.34% of gross loans held for investment, compared with $21.5 million at June 30.
- Real estate owned declined to $2.4 million from $5.5 million. Restructured loans, net, declined to $18.1 million from $25.1 million; $10.8 million were on non-accrual status and 54% were current on payments.
- The company repurchased 287,822 shares for $4.0 million during the six months. It paid a $0.05 quarterly dividend in December and announced a $0.07 dividend in January 2013, a 40% increase.
Outlook, commentary, risks and unusual items
- Management’s stated strategy is moderate community-bank asset growth, reducing the single-family share of held-for-investment loans, increasing higher-yielding “preferred” loans, and shifting deposits toward lower-cost checking and savings accounts. It also expanded mortgage staffing to respond to strong refinancing and purchase activity. No specific earnings or revenue guidance was provided.
- A proposed global settlement with the Bank’s largest legacy loan investor would eliminate that investor’s past, current and future repurchase claims. The company accrued $1.5 million toward the settlement; total loan-sale recourse reserves reached $7.8 million, up from $6.2 million at June 30. Legacy loan repurchase claims remain a risk.
- The six-month tax provision included an $825,000 reversal of a previously recorded liability after tax authorities accepted an accounting-method change, as well as a $229,000 net tax recovery from prior-period adjustments. The six-month effective tax rate was 37.9%, versus 42.7% a year earlier.
- Key risks include real-estate values and credit performance in California, loan repurchase claims, interest-rate movements, mortgage secondary-market conditions, deposit retention, regulatory changes, and valuation assumptions. Management noted that loan-to-value ratios generally are not updated unless deterioration or a modification request prompts review.
- Management said the allowance was adequate based on available information, while noting estimates may differ from actual losses and regulators could require increases. It described liquidity as sufficient and the Bank as well capitalized. Interest-rate models project higher net interest income in rising-rate scenarios and lower income in falling-rate scenarios; management cautioned that model results depend on assumptions.
- The filing reports no legal proceedings considered material and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective at the reasonable-assurance level.
Important facts for investors to verify
- How much of the earnings increase is repeatable: mortgage loan-sale gains and margins drove much of the improvement, while net interest income declined.
- Whether the proposed investor settlement is finalized and whether the $7.8 million recourse reserve adequately covers remaining repurchase exposure.
- Whether improvements in non-performing loans and charge-offs continue, and whether the allowance remains sufficient amid California real-estate and borrower risks.
- Whether deposit outflows, mortgage-loan sale timing, and the decline in cash affect liquidity; also monitor the substantial time deposits scheduled to mature within one year.
- How mortgage production, compensation costs, and sensitivity to interest rates and secondary-market conditions affect future margins and earnings.
- Whether the announced $0.07 dividend is sustainable and consistent with Bank-level capital and regulatory restrictions.