Provident Financial Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended September 30, 2022, the first quarter of fiscal 2023; comparisons of operating results are with the quarter ended September 30, 2021. Provident is a California community banking holding company operating primarily through Provident Savings Bank, with lending concentrated in California real estate.
Financial performance and position
- Profitability: Net income was $2.09 million, down 22% year over year from $2.67 million; diluted EPS was $0.29 versus $0.35. Pre-tax income was $2.96 million. Return on average assets was 0.69% and return on average equity was 6.42% (annualized).
- Revenue and margins: Net interest income rose 14% to $8.97 million; total non-interest income was $1.00 million, making reported total revenue before loan-loss provision $9.97 million. Net interest margin increased to 3.05% from 2.71%. The efficiency ratio worsened to 69.63% from 63.28%.
- Expenses and credit provision: Non-interest expense increased 22% to $6.94 million, including salaries and benefits of $4.14 million. The quarter recorded a $70,000 loan-loss provision, compared with a $339,000 recovery a year earlier. Management attributed the salary comparison in part to a $1.2 million Employee Retention Tax Credit recorded in the prior-year quarter.
- Balance sheet: Assets were $1.246 billion, up 5% from June 30, 2022. Net loans held for investment were $993.9 million, up $53.9 million during the quarter; deposits were $985.3 million, up $29.8 million. Cash and equivalents were $38.7 million. Stockholders’ equity was $129.2 million.
- Funding and liquidity: Borrowings increased to $115.0 million from $85.0 million at June 30, principally to support loan growth. The bank had $280.0 million of remaining FHLB borrowing availability, $276.9 million of available collateral, a $139.7 million Federal Reserve discount-window facility and a $50.0 million correspondent-bank federal funds facility; no advances were outstanding under the latter two facilities. Average liquidity ratio was 21.3%, down from 24.3% in the prior quarter.
- Cash flows: Operating activities provided $2.3 million; investing activities used $45.1 million, primarily reflecting loan growth; financing activities provided $58.1 million, including deposit growth and net borrowing proceeds. Cash increased $15.3 million to $38.7 million.
- Credit quality and investments: Non-performing loans were $964,000, or 0.10% of net loans, down from $1.4 million at June 30. The allowance was $5.6 million, or 0.57% of gross loans. Held-to-maturity securities had $21.7 million of unrealized losses, versus $14.1 million at June 30; management attributed these losses to interest-rate changes, not credit deterioration, and reported no impairment. The estimated fair value of held-to-maturity securities was $154.5 million against a $176.2 million carrying amount.
- Capital and shareholder returns: The bank reported that it exceeded regulatory requirements and was “well-capitalized.” Its September 30 ratios included 9.74% Tier 1 leverage, 17.67% CET1 and 18.54% total capital. The company paid a $0.14-per-share dividend and repurchased 49,624 shares at an average $14.57 per share during the quarter.
Material changes versus comparable periods
- Net interest income benefited from higher yields on interest-earning assets and a larger average loan balance. Net interest margin improved 34 basis points year over year.
- Net income fell despite stronger net interest income, mainly because the prior-year quarter included the $1.2 million ERTC credit and this quarter had a provision instead of a recovery for loan losses. Higher operating expenses also contributed.
- At quarter-end versus June 30, loans grew 6%, deposits grew 3%, and borrowings rose 35%. Time deposits increased to $143.0 million, including $30.0 million of brokered certificates of deposit with a weighted average cost of 2.83%.
- Loan originations for investment were $84.6 million, compared with $60.9 million a year earlier; principal payments declined to $31.7 million from $53.9 million.
Outlook, commentary, risks and unusual items
- Management’s stated strategy is moderate asset and loan growth over the next three years, subject to market conditions, while reducing the share of time deposits and increasing lower-cost checking and savings accounts. No specific earnings or revenue guidance was provided.
- Management said loan credit quality remained very good and considered the allowance adequate based on currently available information. It also cautioned that economic, regulatory and other conditions could require future allowance adjustments.
- The bank’s loan portfolio is heavily concentrated in California real estate. Risks highlighted include changes in interest rates, inflation, recession or slower growth, real-estate values and delinquencies, deposit competition, regulation, cybersecurity and third-party service disruptions.
- The company is preparing to adopt the expected-credit-loss standard on July 1, 2023. It anticipates a one-time increase in the loan-loss allowance through retained earnings, but the amount remains undetermined.
- Interest-rate models project higher 12-month net interest income in rising-rate scenarios, but management cautioned that actual results may differ materially because of assumptions, repricing behavior, prepayments and deposit flows.
- The board declared a subsequent quarterly dividend of $0.14 per share, payable December 8, 2022. The filing reports no pending legal proceeding believed likely to have a material adverse effect and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth and net interest margin can be sustained as deposit costs and borrowing rates respond to further rate changes.
- The cost, stability and maturity profile of deposits, particularly brokered certificates of deposit and uninsured deposits.
- California real-estate exposure, restructured-loan payment performance and any deterioration in delinquencies or collateral values.
- The potential allowance increase upon expected-credit-loss standard adoption and its effect on capital and retained earnings.
- Available liquidity and borrowing capacity, alongside the bank’s regulatory capital position and the company’s continued dividends and share repurchases.