Provident Financial Holdings, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the three months ended September 30, 2016. Comparisons of operating results are with the quarter ended September 30, 2015; balance-sheet comparisons are with June 30, 2016. The company operates community banking and mortgage banking businesses, primarily in Southern California.
Financial performance
| Metric | Quarter / period-end | Comparable period / change |
|---|---|---|
| Net income | $1.594 million | $2.443 million; down 35% |
| Diluted earnings per share | $0.20 | $0.28 |
| Net interest income | $9.088 million | $8.066 million; up 12% |
| Net interest margin | 3.08% | 2.82%; up 26 basis points |
| Non-interest income | $9.252 million | $10.449 million; down 11% |
| Non-interest expense | $15.632 million | $14.360 million; up 8% |
| Efficiency ratio | 85% | 78% |
| Return on average assets / equity | 0.53% / 4.79% | 0.83% / 6.96% |
| Cash dividends per share | $0.13 | $0.12 |
Net interest income benefited from higher average earning assets and margin. Loan-sale gains fell to $8.0 million from $8.9 million, while the average mortgage loan-sale margin declined to 1.25% from 1.65%. Higher personnel and other operating costs, including mortgage-banking costs, also weighed on earnings. The quarter included a $150,000 recovery from the loan-loss allowance; net recoveries were $205,000.
Financial position, cash flow, and capital
- Total assets were $1.243 billion, up $71.1 million from June 30, mainly from growth in loans held for sale and loans held for investment. Loans held for sale were $264.4 million; loans held for investment, net, were $854.0 million.
- Deposits increased 2% to $943.5 million. Transaction accounts rose to $641.6 million, while time deposits declined to $301.9 million.
- Borrowings rose $55.0 million to $146.3 million, primarily to finance increased mortgage-banking activity. The filing reports $257.2 million of remaining FHLB borrowing capacity and $607.9 million of remaining available collateral.
- Cash and cash equivalents were $39.4 million, down $11.8 million from June 30. Operating cash flow was negative $70.6 million, principally reflecting mortgage originations for sale exceeding sale proceeds during the quarter; financing activities provided $69.6 million, including $55.0 million in net short- and long-term borrowing proceeds.
- Non-performing loans were $10.0 million, or 1.17% of loans held for investment, versus $10.3 million and 1.23% at June 30. Real estate owned rose to $3.5 million from $2.7 million. Non-performing assets totaled $13.5 million, up from $13.0 million.
- Stockholders’ equity was $133.2 million. The Bank was classified as well-capitalized and exceeded applicable regulatory capital requirements; its total risk-based capital ratio was 15.57%.
Material changes, outlook, and risks
- Management’s strategy is to grow community banking moderately, reduce single-family loans’ share of the held-for-investment portfolio, increase higher-yielding multi-family, commercial real estate, construction and commercial business loans, and favor lower-cost checking and savings deposits. Management gave no numerical earnings or revenue guidance and cautioned that growth depends on market conditions.
- Mortgage originations and purchases for sale increased 20% to $647.3 million year over year, while loan sales declined to $568.3 million from $601.0 million. Refinance loans were 58% of PBM originations versus 43% a year earlier. Management said loan-sale margins were pressured by servicing-premium volatility and product mix.
- Credit and concentration risks include California real-estate exposure, potential declines in collateral values, borrower payment shocks as adjustable-rate and interest-only loans reset, and possible increases in delinquencies, losses, or required loan-loss reserves. Management said it had not yet seen elevated delinquencies or defaults from payment shocks.
- Other key risks include interest-rate changes, mortgage secondary-market conditions, deposit retention, regulatory requirements, operating costs, technology and cybersecurity, and repurchase claims on previously sold loans. The company’s $453,000 loan-repurchase reserve was unchanged from June 30; management cautioned it may not cover all future claims.
- A jury awarded approximately $173,000 in damages in a former employee’s wrongful-termination case on November 4, 2016. The existing litigation reserve covers the damages awarded, but possible punitive damages were not estimable or accrued; the company had not decided whether to appeal.
- The board declared a $0.13-per-share quarterly dividend payable December 6, 2016. Future dividends remain subject to board consideration, financial and regulatory restrictions, and the Bank’s ability to distribute funds to the holding company.
Important facts for investors to verify
- Whether mortgage-banking volume and loan-sale margins can sustain earnings, given the quarter’s lower gain on sale and higher operating expenses.
- Whether deposit growth, borrowing levels, and available liquidity remain adequate as the mortgage pipeline and loan commitments change.
- Trends in non-performing assets, restructured loans, real estate owned, and the adequacy of the loan-loss allowance.
- The outcome and potential cost of the former employee litigation, including any punitive damages or appeal.
- Whether California property values, interest-rate movements, loan repricing, and repurchase claims materially affect credit quality, earnings, or capital.