Provident Financial Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2018, the first quarter of fiscal 2019. Although the request labels the period “2018 Q1,” the filing reports fiscal 2019 Q1. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless indicated otherwise. The interim financial statements are unaudited.
Business context and reporting period
Provident operates community banking through Provident Savings Bank and mortgage banking through Provident Bank Mortgage. It serves the Inland Empire and broader Southern California, with lending concentrated in real estate. Mortgage banking originates and sells primarily single-family residential loans; community banking funds loans and securities largely with customer deposits.
Financial results and condition
| Metric | Quarter ended September 30, 2018 | Comparable period / prior quarter |
|---|---|---|
| Net interest income | $9.36 million | $9.12 million in Q1 FY2018 |
| Net interest margin | 3.30% | 3.17% in Q1 FY2018 |
| Non-interest income | $4.55 million | $6.35 million in Q1 FY2018 |
| Non-interest expense | $11.70 million | $15.73 million in Q1 FY2018 |
| Loan-loss provision / (recovery) | $(0.24) million recovery | $0.17 million provision in Q1 FY2018 |
| Net income / (loss) | $1.82 million; diluted EPS $0.24 | $(0.23) million; diluted EPS $(0.03) in Q1 FY2018 |
| Cash and cash equivalents | $78.9 million | $43.3 million at June 30, 2018 |
| Loans held for investment, net | $877.1 million | $902.7 million at June 30, 2018 |
| Loans held for sale | $78.8 million | $96.3 million at June 30, 2018 |
| Deposits | $902.1 million | $907.6 million at June 30, 2018 |
| Borrowings | $111.1 million | $126.2 million at June 30, 2018 |
| Total assets / stockholders’ equity | $1.16 billion / $121.7 million | $1.18 billion / $120.5 million at June 30, 2018 |
Operating cash flow was $23.6 million, compared with cash used of $8.7 million in Q1 FY2018. Investing activities provided $34.4 million, while financing activities used $22.4 million. Cash increased $35.6 million during the quarter. The filing says cash was 7% of total assets. The Bank reported a 16.6% average liquidity ratio for the quarter and $289.8 million of remaining FHLB borrowing capacity; it had no advances under its discount-window or correspondent-bank facilities at quarter-end.
The Bank was categorized as well-capitalized. At September 30, 2018, its Tier 1 leverage ratio was 9.59%, CET1 ratio 16.62%, Tier 1 risk-based capital ratio 16.62%, and total risk-based capital ratio 17.71%. The holding company’s corresponding ratios were 10.44%, 18.09%, 18.09%, and 19.18%.
Material changes versus comparable periods
- Net income improved from a loss to profit. The filing attributes the change principally to the absence of a $2.75 million litigation settlement expense recorded in Q1 FY2018, lower salaries and other expenses, a loan-loss recovery, and higher net interest income.
- Net interest income rose 3% year over year as net interest margin increased 13 basis points. Average interest-earning assets declined 1%; the average yield on those assets increased 14 basis points to 3.88%, while the average cost of interest-bearing liabilities rose 2 basis points to 0.64%.
- Non-interest income declined 30%, mainly because gain on loan sales fell $1.7 million to $3.1 million. Loan sale volume fell 54% to $181.8 million; the average loan sale margin improved to 1.70% from 1.24%.
- Non-interest expense fell 26%, including the prior-year settlement charge and lower mortgage banking compensation. Mortgage banking full-time equivalent employees declined 29% year over year to 169.
- At quarter-end, non-performing loans, net of allowance and fair-value adjustments, were $6.9 million, up from $6.1 million at June 30, 2018; non-performing assets were $7.4 million, or 0.64% of assets, versus $7.0 million, or 0.59%. The allowance was $7.2 million, or 0.81% of gross loans held for investment.
- Assets decreased $18.1 million from June 30, mainly as loans, loans held for sale, and securities declined. Deposits fell $5.5 million and borrowings fell $15.0 million. Management said the deposit mix shift toward transaction accounts and away from time deposits was consistent with strategy.
Outlook, risks, contingencies, and unusual items
- Outlook and strategy: No specific earnings or financial guidance is provided. Management describes a three-year goal, subject to market conditions, of moderate asset growth, increased single-family and higher-yielding lending, and a greater share of lower-cost checking and savings deposits. Mortgage operations may be adjusted for market conditions, including staffing, product mix, underwriting, and expenses.
- Interest-rate sensitivity: Management’s model shows the company as asset-sensitive. A modeled 12-month net interest income increase ranges from 4.83% under a +100 basis-point shock to 10.25% under +400 basis points; a -100 basis-point shock projects a 5.79% decline. These are model estimates, not forecasts, and depend on assumptions about repricing, prepayments, and deposit behavior.
- Credit and geographic risk: Most real-estate-secured lending is in California. Non-performing loans increased during the quarter, including a new $745,000 non-performing construction loan. Management considers the allowance adequate but cautions that economic, real-estate, regulatory, or other changes could require higher reserves and materially affect results.
- Mortgage and off-balance-sheet exposure: Loan sale gains and fair values are exposed to mortgage rates and secondary-market conditions. Customer credit commitments totaled $49.2 million; disclosed construction and line-of-credit undisbursed funds and investment-loan commitments totaled $13.9 million. The company also faces possible investor repurchase claims; its recourse reserve was $250,000 after three loan repurchases totaling $253,000 during the quarter.
- Legal matters: The filing reports no material change to previously disclosed proceedings. Final approval of the McKeen-Chaplin and Neal settlement was scheduled for November 13, 2018; the Cannon settlement remained subject to court approval. The $2.75 million settlement expense in the prior-year quarter was not repeated.
- Other items: The company adopted ASC 606 on July 1, 2018; it reported no cumulative adjustment and no material change in revenue timing or amount. A $0.14-per-share quarterly dividend was declared for payment on December 6, 2018. Management reported disclosure controls effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether lower mortgage origination and loan-sale volumes, and the resulting reduction in gain-on-sale income, continue in subsequent quarters.
- Whether non-performing loans, including the construction exposure, and restructured-loan performance improve or deteriorate; compare trends with the allowance and charge-offs.
- Whether the improved net interest margin persists as rates and deposit costs change, and how actual results compare with the filing’s interest-rate sensitivity scenarios.
- Whether deposit retention, liquidity, borrowing levels, regulatory capital, and the Bank’s ability to upstream dividends support the company’s dividend and capital plans.
- Final court outcomes and costs for the disclosed litigation, and whether investor repurchase claims require additional reserves.