Provident Financial Holdings, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended June 30, 2018, compared primarily with fiscal 2017. The request metadata says “2017 Q4,” but the filing is an annual report for FY2018; its fourth-quarter results are for the quarter ended June 30, 2018.
Business context
Provident is a Riverside, California-based savings bank holding company operating community banking and mortgage banking businesses. Its principal markets are Riverside and San Bernardino counties, with mortgage lending across California. At June 30, 2018, it reported $1.18 billion in assets and operated 14 banking offices.
Financial performance and condition
| Metric | FY2018 / June 30, 2018 | FY2017 / June 30, 2017 |
|---|---|---|
| Net income | $2.1 million; diluted EPS $0.28 | $5.2 million; diluted EPS $0.64 |
| Net interest income | $36.3 million; net interest margin 3.19% | $35.7 million; net interest margin 3.06% |
| Non-interest income | $21.9 million | $30.8 million |
| Non-interest expense | $53.2 million | $58.8 million |
| Total assets | $1.18 billion | $1.20 billion |
| Deposits | $907.6 million | $926.5 million |
| FHLB borrowings | $126.2 million; weighted-average rate 2.47% | $126.2 million; weighted-average rate 2.39% |
| Cash and cash equivalents | $43.3 million | $72.8 million |
| Stockholders’ equity | $120.5 million | $128.2 million |
Net interest income after the $536,000 recovery from the allowance for loan losses was $36.8 million. Operating cash flow was $28.0 million; investing cash flow was negative $27.3 million and financing cash flow was negative $30.2 million. Cash declined by $29.5 million during the year. The bank had $275.1 million of remaining FHLB borrowing availability, a $73.2 million Federal Reserve discount-window facility and a $17.0 million correspondent-bank federal funds facility; neither latter facility had borrowings outstanding.
Credit indicators improved in some respects: net loans held for investment were $902.7 million, non-performing loans were $6.1 million (0.67% of net loans), and non-performing assets were $7.0 million (0.59% of assets). The allowance for loan losses was $7.4 million, or 0.81% of gross loans, down from $8.0 million, or 0.88%. Classified assets, however, rose to $15.8 million from $13.3 million, principally reflecting three multifamily loans to one borrower placed in special mention.
Regulatory capital was above “well-capitalized” thresholds: the Bank’s Tier 1 leverage, CET1, Tier 1 and total capital ratios were 10.0%, 16.8%, 16.8% and 17.9%, respectively. The Corporation’s corresponding ratios were 10.3%, 17.4%, 17.4% and 18.5%.
Material changes from FY2017
- Net income fell $3.1 million, or about 59%. The main pressures were a $9.9 million decline in net gain on loan sales, a $1.6 million rise in other non-interest expense, and a $1.8 million deferred-tax revaluation charge associated with the Tax Act.
- Mortgage originations and purchases for sale declined 36% to $1.27 billion; loan sale volume fell 37% to $1.15 billion. Management attributed lower production mainly to higher mortgage rates and reduced refinancing and home-purchase activity. PBM reduced its full-time-equivalent workforce to 173 from 253.
- Net interest income rose 2%, and net interest margin expanded 13 basis points to 3.19%, despite a lower average balance of interest-earning assets.
- Deposits declined 2%; time deposits fell 11% while transaction accounts increased 2%, consistent with the stated funding strategy. Investment securities increased 37% to $95.3 million, while cash declined 41%.
- Non-performing assets declined 27%, but classified assets increased. Net charge-offs were $118,000, versus net recoveries of $411,000 in FY2017.
- Quarterly dividends increased to $0.14 per share from $0.13. The company repurchased 383,585 shares at an average $19.00 per share during FY2018.
Outlook, commentary, risks and unusual items
- Management’s three-year strategy, subject to market conditions, is to grow assets moderately, increase single-family and higher-yielding loans, and shift funding toward lower-cost checking and savings accounts. No quantified earnings or growth guidance is provided.
- Management expects mortgage operations to adjust staffing, product mix, underwriting and expenses as market conditions change. Rising rates have already reduced mortgage production; continued rate increases could also raise funding costs, affect borrowers with adjustable-rate loans and pressure collateral values.
- Credit risk is concentrated in real estate lending: multifamily and commercial real estate loans were 64.4% of loans held for investment, and approximately 78% of real estate loans were secured by properties and borrowers in Southern California. The filing also identifies earthquake, fire and other regional disaster exposure.
- Non-traditional single-family loans totaled $79.0 million, or 8.7% of loans held for investment; categories include stated-income, negative-amortization, interest-only, longer-amortization and lower-FICO loans. Categories may overlap. LIBOR transition risk is also noted because many portfolio adjustable-rate loans use LIBOR.
- Two employment class-action matters had proposed settlements totaling $1.8 million and $2.8 million. Court approval and customary settlement conditions remained outstanding; the filing reports $3.4 million of FY2018 litigation settlement expense.
- The Tax Act reduced the federal corporate rate to 21% beginning in calendar 2018. FY2018 used a blended 28.06% federal statutory rate and included a $1.77 million net deferred-tax revaluation charge; management expected the 21% rate to apply for FY2019.
- Management reported no material weakness in internal control over financial reporting, and the auditor issued unqualified opinions on the financial statements and internal controls. The board declared a $0.14-per-share dividend after year-end, payable September 11, 2018.
Important facts for investors to verify
- Whether mortgage production and gain-on-sale income stabilize as rates and housing-market conditions change, and whether expense reductions can offset lower volume.
- Trends in classified loans, especially the three multifamily loans to one borrower, and the adequacy of the allowance as the portfolio and economic conditions evolve.
- Deposit retention, funding costs, liquidity and reliance on FHLB advances, including maturities and available collateral.
- Final approval and payment of the employment settlements, and any further litigation expense or contingent exposure.
- The realized effect of the lower federal tax rate and the outcome of the company’s deferred-tax-asset ownership-change analysis.
- Potential effects of LIBOR replacement and the forthcoming expected-credit-loss standard (CECL), which the filing says will require revised credit-loss estimation processes.