Provident Financial Holdings, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2019, compared primarily with fiscal 2018. Although the request metadata says “2018 Q4,” this filing is an annual report for fiscal 2019, not a quarterly filing. Dollar amounts below are in U.S. dollars.
Business context
Provident is a bank holding company whose principal subsidiary, Provident Savings Bank, operates 13 branches in Riverside and San Bernardino counties in Southern California. Its community banking business is funded mainly by customer deposits and focuses on residential, multifamily and commercial real estate lending. Multifamily and commercial real estate loans made up about 62.5% of gross loans held for investment at year-end; the portfolio is concentrated in California.
Financial performance and position
| Metric | FY2019 / June 30, 2019 | FY2018 / June 30, 2018 |
|---|---|---|
| Net income | $4.4 million; diluted EPS $0.58 | $2.1 million; diluted EPS $0.28 |
| Income before taxes | $5.9 million | $5.5 million |
| Net interest income | $38.2 million | $36.3 million |
| Net interest margin | 3.47% | 3.19% |
| Total non-interest income | $12.5 million | $21.9 million |
| Total non-interest expense | $45.2 million | $53.2 million |
| Total assets | $1.085 billion | $1.176 billion |
| Loans held for investment, net | $879.9 million | $902.7 million |
| Deposits | $841.3 million | $907.6 million |
| FHLB borrowings | $101.1 million | $126.2 million |
| Stockholders’ equity | $120.6 million | $120.5 million |
Total interest income was $44.4 million, against $6.2 million of interest expense. The efficiency ratio improved to 89% from 91%; return on average assets was 0.39% versus 0.18%, and return on average equity was 3.63% versus 1.73%.
Cash and cash equivalents rose to $70.6 million from $43.3 million. Cash flow from operating activities was $107.1 million, investing activities provided $17.3 million, and financing activities used $97.1 million, resulting in a $27.3 million increase in cash. The filing does not provide a conventional corporate debt-to-equity ratio; reported borrowings were FHLB advances.
At June 30, 2019, the Bank’s regulatory capital ratios were 10.5% Tier 1 leverage, 18.0% CET1, 18.0% Tier 1 risk-based and 19.1% total capital. The Bank was categorized as well capitalized. Average liquidity ratio for the quarter was 20.7%, compared with 14.9% a year earlier; unused FHLB borrowing availability was $275.2 million. The Bank reported no outstanding borrowings under its Federal Reserve discount-window or correspondent-bank facilities.
Material changes versus the prior year
- Net income more than doubled, but the increase was largely affected by the $1.8 million deferred-tax revaluation charge recorded in FY2018 under the Tax Act, which did not recur. Pretax income rose about 7%.
- Net interest income increased 5%, primarily as the net interest margin expanded 28 basis points. Average interest-earning assets declined 3%.
- Non-interest income fell 43%, mainly because gain on loan sales declined 55% to $7.1 million as saleable mortgage production was reduced. Loans originated for sale fell 61%, from $1.19 billion to $467.1 million; there were no loans held for sale at year-end, versus $96.3 million in 2018.
- Non-interest expense declined 15%. FY2019 included $2.8 million of non-recurring mortgage-business rescaling costs; FY2018 included $3.4 million of litigation settlement expense.
- Deposits declined 7%, with time deposits down 19%. Transaction accounts increased as a share of deposits to 77% from 74%, consistent with the strategy to favor lower-cost funding. FHLB borrowings declined 20%.
- Net loans held for investment declined 3%. Non-performing assets fell to $6.2 million, or 0.57% of assets, from $7.0 million, or 0.59%; there was no REO at year-end. The allowance for loan losses was $7.1 million, or 0.80% of gross loans, compared with $7.4 million, or 0.81%.
Outlook, risks and unusual items
- Management’s three-year strategy, subject to market conditions, is moderate asset and loan growth, increasing portfolio lending and the share of checking and savings deposits, and reducing reliance on time deposits.
- Provident announced it would scale back saleable single-family mortgage originations and focus more on portfolio originations and purchases. Management expects this to eliminate quarterly pretax losses from the saleable-mortgage operation and estimates an increase in pretax income of approximately $1.2 million per quarter, but cautions that timing and realization are uncertain.
- Key exposures include California real estate and economic conditions, concentrations in multifamily and commercial real estate loans, borrower credit quality, interest-rate and funding-cost changes, deposit outflows, and the valuation and adequacy of the loan-loss allowance. The filing also highlights LIBOR’s expected phaseout after 2021 and related transition, contract and funding risks.
- Non-traditional single-family loans totaled $58.5 million, including stated-income, interest-only, negative-amortization, longer-amortization and low-FICO categories that may overlap. Special-mention loans were $8.6 million, up from $7.5 million.
- The McKeen-Chaplin and Neal employment cases were completed and dismissed in FY2019 after settlement. The Cannon settlement, with a stated maximum of $2.8 million, received final approval in July 2019 and was funded in August; the final amount may be slightly lower. No other pending proceeding was identified as expected to materially affect the company.
- After year-end, the Board declared a $0.14-per-share cash dividend, payable September 10, 2019. The company paid $0.56 per share in FY2019. Future dividends remain subject to Board discretion and regulatory limits.
- Management expected to adopt the new lease standard on July 1, 2019, increasing premises-and-equipment assets and other liabilities by about $3.3 million, with no material overall financial-statement impact expected. The company was evaluating CECL; the filing describes a proposed extension for certain SEC registrants to fiscal years beginning after December 15, 2022.
Important facts for investors to verify
- Confirm how quickly the mortgage-originations strategy delivers the expected quarterly pretax benefit, and whether reduced loan-sale revenue is offset by recurring cost savings and portfolio growth.
- Review deposit trends, deposit pricing and retention, the $106.1 million of time deposits maturing within one year, and continued access to FHLB and other liquidity sources.
- Assess California real estate concentration and multifamily/commercial real estate credit quality, including special-mention and non-performing balances, the construction non-performing loan, and allowance assumptions.
- Separate recurring earnings from one-time items, particularly the FY2018 tax revaluation and litigation costs and FY2019 restructuring costs; monitor whether margin improvement persists.
- Check final Cannon settlement costs, any remaining employment or loan-sale repurchase exposure, and the consequences of the LIBOR transition and adoption of CECL and lease accounting.