Provident Financial Holdings, Inc. (NASDAQ: PROV) — Form 10-Q summary
Period note: The request metadata says “2018 Q3,” but the filing is for the quarter ended March 31, 2019 (the third quarter of fiscal 2019), and includes nine-month results through that date. The filing was signed May 9, 2019. Dollar amounts below are in millions unless otherwise noted.
Business context and reporting period
Provident Financial Holdings is the holding company for Provident Savings Bank, a Riverside, California-based community bank operating primarily in the Inland Empire. Its activities include community banking and mortgage banking through Provident Bank Mortgage (PBM). Management announced plans to exit PBM by June 30, 2019, while continuing to originate and purchase certain single-family loans for the Bank’s portfolio.
Financial performance and position
| Metric | Quarter ended March 31, 2019 | Nine months ended March 31, 2019 |
|---|---|---|
| Net interest income | $9.6; +5% year over year | $28.8; +7% |
| Net income (loss) | $(0.15), versus $1.73 income | $3.63, versus $0.73 income |
| Diluted EPS | $(0.02), versus $0.23 | $0.48, versus $0.09 |
| Non-interest income | $3.1; down 40% | $11.2; down 35% |
| Non-interest expense | $13.0; up 5% | $35.6; down 14% |
| Net interest margin | 3.53%, up 30 basis points | 3.45%, up 29 basis points |
- Quarterly loss was principally associated with lower loan-sale gains and increased salary expense, including mortgage-banking exit costs. Nine-month earnings benefited from the absence of prior-year litigation and tax-revaluation charges.
- Quarterly efficiency ratio was 103%, versus 87% a year earlier; the nine-month ratio improved to 89% from 93%. Nine-month return on average assets was 0.42% and return on average equity was 3.97%; both were negative for the quarter, at (0.05)% and (0.49)%, respectively.
- At March 31, total assets were $1.119 billion, down 5% from June 30, 2018. Cash and equivalents were $61.5; investment securities $108.8; net loans held for investment $883.6; and loans held for sale $30.5.
- Deposits were $876.9, down 3% from June 30, 2018; borrowings were $101.1, down 20%; and stockholders’ equity was $121.2. Cash dividends were $0.14 per share for the quarter and $0.42 per share for the nine months.
- Operating cash flow was $72.2 for the nine months, compared with $32.6 a year earlier; cash increased $18.2 to $61.5. These cash-flow figures reflect substantial mortgage-loan origination and sale activity.
- Loan-loss allowance was $7.08, or 0.79% of gross loans held for investment. Non-performing loans, net of allowance and fair-value adjustments, were $6.1; non-performing assets were $6.1, or 0.55% of assets. No real estate owned remained at quarter end.
- The Bank reported it exceeded regulatory capital requirements and was “well-capitalized.” Its March 31 capital ratios included 10.17% Tier 1 leverage, 17.24% CET1 and 18.34% total risk-based capital. Cash was 5% of assets; the quarterly average liquidity ratio was 22.6%.
Material changes versus comparable periods
- Quarterly net income shifted to a loss of $0.15 from income of $1.73. Loan-sale gains fell $1.9 to $1.7, while salary and benefits expense rose $0.5 to $9.3.
- For the nine months, net income rose to $3.63 from $0.73. The comparison was substantially affected by prior-year one-time charges: a $3.4 litigation settlement expense and a $1.9 net deferred-tax-asset revaluation charge. Net interest income increased $1.8, while loan-sale gains declined $5.7.
- Loan-sale volume for the nine months fell 55% to $408.9. Loans held for sale declined 68% from June 30, 2018, reflecting reduced mortgage originations as PBM winds down.
- Loans held for investment declined 2% to $883.6, mainly due to a $26.2 decrease in multifamily loans, partly offset by growth in commercial real estate loans. Deposits and borrowings also contracted.
- Net interest margin improved year over year, supported by higher asset yields and lower average interest-bearing liabilities; loan and deposit balances were lower.
Outlook, management commentary, and risks
- PBM exit: The company expected to complete the exit by June 30, 2019, with approximately 122 fewer full-time-equivalent employees. Estimated total one-time exit costs were $3.6–$4.0, including $1.6 incurred through March 31; expected cash outlays were $3.5–$3.9.
- Management estimated that, once fully phased in during fiscal 2020, the exit would increase quarterly pretax income by approximately $1.2 compared with the second quarter of fiscal 2019. It also anticipated lower mortgage-segment revenue and expense, and some costs and revenue shifting to community banking. These are estimates, not assurances; the filing cautions that exit timing, costs, and benefits may differ.
- Management’s community-banking strategy is moderate asset growth, increased single-family and higher-yielding loan activity, and a greater share of lower-cost checking and savings deposits. The company cautions that economic weaknesses may prevent growth.
- Credit and concentration risks include California real estate exposure: substantially all real-estate collateral is in California, and 78% of real-estate-secured loan balances were in the Inland Empire or other Southern California. Management noted that reported LTVs are based on origination information and are not routinely updated.
- Other risks include interest-rate and prepayment movements, deposit retention, secondary-market conditions, loan repurchase claims, regulatory actions, litigation, and operational or third-party technology disruptions. The company had repurchased five loans totaling $0.70 during the nine months and carried a $0.25 recourse reserve.
- Interest-rate models indicated asset sensitivity: projected 12-month net interest income increased 5.00% under a +100-basis-point shock and declined 5.86% under a −100-basis-point shock. Management emphasized that actual results may differ from model assumptions.
- The Board declared a subsequent $0.14-per-share dividend payable June 11, 2019, and extended the April 2018 repurchase plan through April 26, 2020. At March 31, 349,252 shares remained authorized for repurchase.
- Disclosure controls were assessed as effective at a reasonable-assurance level; no material change in internal control over financial reporting was reported. A previously disclosed class-action settlement was approved and the cases dismissed; another settlement had preliminary court approval, with final approval hearing scheduled for July 24, 2019.
Most important facts for investors to verify
- Whether PBM exited on schedule, whether final costs stayed within the $3.6–$4.0 estimate, and whether the projected quarterly pretax benefit of about $1.2 materialized.
- Whether community-bank earnings and net interest margin can offset the loss of mortgage-banking revenue, particularly given the sharp decline in loan-sale volume.
- Trends in non-performing loans, criticized/classified loans, the allowance, and California collateral values; reported LTVs may not reflect current property values.
- Deposit levels and mix, liquidity sources, borrowing costs, and the Bank’s regulatory capital position as deposits mature and the business mix changes.
- Actual cash costs and workforce effects of the PBM wind-down, loan repurchase claims and reserve adequacy, and the status of the pending settlement and any other contingencies.
- Confirm the intended reporting period: the supplied filing is for fiscal Q3 2019, not 2018 Q3.