Provident Financial Holdings, Inc. — Form 10-Q
Reporting period: Quarter ended September 30, 2021, the first quarter of fiscal 2022. The request labels this “2021 Q1,” but the filing reports fiscal Q1 2022. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Business context and financial position
Provident is a bank holding company operating through Provident Savings Bank, with community banking focused on deposits and real-estate lending, primarily in California. At September 30, 2021, total assets were $1.192 billion, deposits $956.7 million, and stockholders’ equity $128.2 million.
- Loans held for investment, net: $859.0 million, up $8.1 million from June 30, 2021. Gross loans were principally multifamily ($489.6 million) and single-family ($275.0 million).
- Cash and cash equivalents: $88.2 million, up $18.0 million from June 30. Investment securities: $209.1 million, down $17.8 million.
- Deposits increased $18.8 million to $956.7 million; transaction accounts rose while time deposits declined. Time deposits were 14% of deposits, versus 15% at June 30.
- Borrowings fell $11.0 million to $90.0 million, primarily from maturities of long-term borrowings. The filing does not report a conventional debt-to-equity ratio.
Quarterly results and cash flow
| Metric | Quarter ended Sep. 30, 2021 | Prior-year quarter | Change |
|---|---|---|---|
| Interest income | $8.746 million | $9.519 million | Down 8% |
| Net interest income | $7.888 million | $8.166 million | Down 3% |
| Net interest margin | 2.71% | 2.84% | Down 13 bps |
| Non-interest income | $1.069 million | $1.159 million | Down 8% |
| Non-interest expense | $5.668 million | $6.985 million | Down 19% |
| Net income | $2.667 million | $1.485 million | Up 80% |
| Diluted EPS | $0.35 | $0.20 | Up 75% |
- The quarter recorded a $339,000 recovery of loan losses, compared with a $220,000 provision in the prior-year quarter. The allowance was $7.4 million, or 0.86% of gross loans.
- Efficiency ratio improved to 63% from 75%; return on average assets was 0.89% versus 0.50%, and return on average equity was 8.39% versus 4.78%.
- Operating cash flow was $3.0 million, essentially unchanged year over year. Cash increased $18.0 million during the quarter to $88.2 million. The cash flow statement reports $9.1 million of net cash from investing activities and $5.9 million from financing activities.
- Cash dividends were $0.14 per share, unchanged from the prior-year quarter.
Material changes, outlook, and risks
- Earnings growth reflected a $1.3 million decline in non-interest expense, largely due to a $1.2 million Employee Retention Tax Credit (ERTC) recorded as a credit to salaries and benefits, and the improvement in loan-loss provision. These items partly offset lower net interest income and lower loan servicing and other fees.
- Management said it expects net interest income and margin may remain compressed through the rest of calendar 2021 and possibly longer. Its longer-term strategy is moderate asset and loan growth, with more lower-cost checking and savings funding and a lower proportion of time deposits. No specific earnings or revenue guidance was provided.
- Credit quality improved in some measures: non-performing loans, net of allowance and fair-value adjustments, declined to $6.6 million from $8.6 million at June 30; non-performing loans were 0.77% of loans. However, restructured loans totaled $7.9 million, and the share current under modified terms fell to 85% from 97% at June 30.
- COVID-19 relief had largely run off: one forbearance loan remained, with a $308,000 balance, and there were no pending relief requests. Management cited uncertainty around the pandemic and the economy.
- Liquidity included $305.8 million of remaining FHLB borrowing availability, a $189.8 million Federal Reserve discount-window facility, and a $17.0 million correspondent-bank federal funds facility; there were no advances under the latter two facilities at quarter-end. The Bank was classified as well-capitalized. Its reported capital ratios included 9.81% Tier 1 leverage and 20.12% total risk-based capital.
- Interest-rate exposure remains a key sensitivity: management’s model projected 12-month net interest income increases of 0.88% for a +100 bp shock and 6.24% for +300 bp, and a 0.63% increase for a -100 bp shock. Management cautioned that model results depend on assumptions and may differ from actual outcomes.
- Principal risks include California real-estate concentration, borrower credit deterioration, interest-rate and funding changes, deposit competition, COVID-19 effects, regulatory actions, and operational or technology disruptions. The filing reported no pending legal proceedings believed likely to have a material adverse effect, no material risk-factor changes, and effective disclosure controls.
Important facts for investors to verify
- Whether the $1.2 million ERTC credit is nonrecurring and how it affects comparisons of ongoing expenses and earnings.
- Subsequent trends in net interest margin, asset yields, deposit costs, and management’s expectation of continued margin compression.
- Performance and collateral coverage of non-performing and restructured loans, including the declining proportion of restructured loans current on modified terms.
- Allowance adequacy under changing economic and California property-market conditions, given management’s reliance on estimates and the portfolio’s real-estate concentration.
- Liquidity and capital headroom, including the effect of dividends and planned share repurchases; 49,764 shares were repurchased during the quarter at a weighted average $17.10 per share.