Provident Financial Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2020. Although the request labels this “2020 Q1,” the filing reports the first quarter of fiscal 2021. Provident is a California-focused bank holding company operating through Provident Savings Bank, with a loan portfolio concentrated in real estate.
Key financial results
| Metric | Quarter ended Sep. 30, 2020 | Prior-year quarter |
|---|---|---|
| Interest income | $9.5 million | $11.1 million |
| Net interest income | $8.2 million | $9.6 million |
| Provision (recovery) for loan losses | $220,000 provision | $181,000 recovery |
| Non-interest income | $1.2 million | $1.1 million |
| Non-interest expense | $7.0 million | $7.2 million |
| Net income | $1.5 million | $2.6 million |
| Diluted EPS | $0.20 | $0.33 |
| Net interest margin | 2.84% | 3.64% |
Net income fell 42%. The net interest margin contracted 80 basis points as asset yields declined faster than funding costs. Return on average assets was 0.50% (0.95% prior year), return on average equity was 4.78% (8.46%), and the efficiency ratio increased to 75% from 68%. The quarterly dividend was $0.14 per share in both periods.
Financial condition, cash flow and liquidity
- At September 30, 2020, total assets were $1.184 billion, deposits $904.7 million, borrowings $136.0 million, and stockholders’ equity $124.7 million. Versus June 30, assets rose $7.2 million, deposits rose $11.7 million, borrowings fell $5.0 million, and equity rose $683,000.
- Cash and cash equivalents declined $49.6 million to $66.5 million, primarily as cash funded investment purchases. Investment securities increased $75.0 million to $198.3 million; loans held for investment declined $17.8 million to $885.0 million.
- Quarterly operating cash flow was $3.0 million, investing cash outflow was $58.2 million, and financing cash inflow was $5.6 million. Net cash decreased $49.6 million.
- Transaction accounts increased $20.7 million while time deposits fell $9.0 million; time deposits were 18% of deposits at quarter-end. Cash represented 6% of total assets. Available FHLB borrowing capacity was $255.4 million; the Bank also had a $165.7 million Federal Reserve discount-window facility and a $17.0 million correspondent-bank facility, with no advances under the latter two at quarter-end.
- The Bank was classified as well-capitalized. At September 30, its Tier 1 leverage ratio was 9.64%, CET1 ratio 16.94%, Tier 1 risk-based ratio 16.94%, and total risk-based capital ratio 18.19%.
Material changes and asset quality
- Interest income fell 14%, primarily due to lower yields on loans, investments and interest-earning deposits. Interest expense declined 10%, as lower deposit costs more than offset higher borrowing expense.
- The allowance for loan losses rose to $8.49 million from $8.27 million at June 30; it equaled 0.95% of gross loans. Management increased qualitative loss factors in response to COVID-19 and weaker economic conditions. There were $5,000 of net recoveries and no charge-offs in the quarter.
- Non-performing loans, net of allowances and fair-value adjustments, declined to $4.5 million from $4.9 million; non-performing loans were 0.51% of net loans. Classified loans decreased to $10.6 million from $14.1 million. No real estate owned was reported.
- At quarter-end, 45 COVID-19 forbearance loans remained, totaling $17.6 million, or 1.99% of total loans. One additional single-family relief request of approximately $264,000 was pending. The filing states interest continues to accrue on deferred loans unless they are non-performing.
- Loans originated and purchased totaled $48.0 million, down from $93.4 million a year earlier; loan principal payments totaled $66.3 million. Deposits increased partly due to government assistance-related transaction-account balances.
Outlook, risks and other notable items
Management intends to pursue moderate asset and loan growth and shift funding toward lower-cost transaction accounts. It cautioned that the duration and economic effects of COVID-19 are uncertain and expects net interest income and net interest margin to remain adversely affected through the remainder of calendar 2020 and possibly longer. The filing provides no quantified earnings or margin guidance.
Management identified potential COVID-19 effects including further credit deterioration, higher loan-loss provisions, additional loan modifications, reduced fees, and higher operating costs. Other principal risks include California real estate values and loan performance, interest-rate and funding sensitivity, competition, regulatory changes, technology and third-party disruptions, and the adequacy of fair-value estimates. The Bank’s business is concentrated in California real estate lending. The company reported no pending legal proceeding it believed would materially adversely affect its financial condition, operations or cash flows; it reported no material changes to previously disclosed risk factors.
The Board declared a $0.14-per-share dividend payable December 10, 2020 to shareholders of record November 19. The company made no common-stock repurchases under its April 2020 plan during the quarter; it purchased 2,556 shares at $11.68 per share to settle employee withholding obligations.
Important facts for investors to verify
- Whether COVID-19 forbearance borrowers resume scheduled payments and whether any relief extensions or defaults emerge.
- Whether the allowance for loan losses remains adequate as economic conditions, unemployment and California property markets evolve.
- Whether the sharp decline in net interest margin persists and how deposit costs and asset repricing affect future earnings.
- The composition and performance of the concentrated California real estate loan portfolio, including multi-family and commercial property exposures.
- Available liquidity, deposit trends, borrowing capacity and regulatory capital, including the effect of future dividends or repurchases.