Provident Financial Holdings, Inc. — Form 10-Q Summary
Business context and period. Provident is a California-based savings bank holding company operating community banking and mortgage banking businesses. This report covers the quarter ended September 30, 2017, the first quarter of fiscal 2018, and compares operating results with the quarter ended September 30, 2016. Balance-sheet changes are compared with June 30, 2017.
Key financial metrics
| Metric | Quarter ended September 30, 2017 | Comparable period or change |
|---|---|---|
| Interest income | $10.7 million | $10.8 million, down 1% |
| Net interest income | $9.1 million | $9.1 million, up $30,000 |
| Net interest margin | 3.17% | 3.08%, up 9 basis points |
| Provision for loan losses | $169,000 | $150,000 recovery in prior-year quarter |
| Non-interest income | $6.4 million | $9.3 million, down 31% |
| Non-interest expense | $15.7 million | $15.6 million, up 1% |
| Net result and diluted EPS | Net loss of $225,000; loss per share of $0.03 | Net income of $1.6 million; diluted EPS of $0.20 |
| Efficiency ratio | 102% | 85% in prior-year quarter |
| Cash and cash equivalents | $49.2 million | Down $23.6 million from June 30, 2017 |
| Total assets | $1.19 billion | Down $6.8 million from June 30, 2017 |
| Loans held for investment, net | $908.1 million | Up $3.1 million from June 30, 2017 |
| Loans held for sale | $127.2 million | Up $10.7 million from June 30, 2017 |
| Deposits | $927.0 million | Up $495,000 from June 30, 2017 |
| Borrowings and stockholders’ equity | $121.2 million; $124.9 million | Borrowings down $5.0 million; equity down $3.3 million from June 30, 2017 |
| Operating, investing and financing cash flows | $(8.7) million; $(7.0) million; $(7.9) million | Cash decreased $23.6 million; ended at $49.2 million |
The Bank reported regulatory capital ratios above applicable minimums and was categorized as well-capitalized. At September 30, 2017, its Tier 1 leverage ratio was 9.54%, Common Equity Tier 1 ratio 15.79%, and total capital ratio 16.95%. The Bank reported $289.5 million of remaining FHLB borrowing capacity, $519.3 million of remaining available collateral, a $67.1 million Federal Reserve discount-window facility, and a $17.0 million correspondent-bank facility; it had no outstanding advances under the latter two facilities.
Material changes versus the prior comparable period
- Net income shifted to a $225,000 loss from $1.6 million of income. Management attributed the decline primarily to lower gains on loan sales and the $2.75 million litigation settlement expense.
- Net gain on loan sales fell 40% to $4.8 million. Loan sale volume declined 39% to $392.2 million, with lower refinance activity; refinance loans were 42% of PBM originations versus 58% a year earlier.
- Mortgage originations and purchases for sale were $392.3 million, versus $647.3 million; total loans originated and purchased across both businesses were $437.2 million, down 38% from $705.6 million.
- Net interest margin improved to 3.17%, reflecting higher asset yields and a slightly lower average cost of interest-bearing liabilities, while average interest-earning assets declined 2%.
- Non-performing loans, net of allowance and fair-value adjustments, were approximately $8.0 million and 0.88% of loans held for investment, broadly unchanged from June 30. Non-performing assets declined to $8.0 million, or 0.67% of assets, from $9.6 million, mainly as foreclosed real estate was sold.
- On the balance sheet, transaction accounts increased while time deposits declined; management said this reflects its strategy to grow lower-cost checking and savings deposits. Borrowings declined with the maturity of short-term funding.
Outlook, commentary, risks and unusual items
- Strategy, not formal guidance: Management intends to pursue moderate asset growth, increase single-family and higher-yielding “preferred” loans, and shift deposits toward lower-cost transaction accounts. Mortgage operations may be adjusted, including staffing and product mix, in response to market conditions. The filing provides no quantified earnings or revenue guidance.
- Litigation settlement: The Bank recorded $2.75 million of expense for the Cannon wage-and-hour class action settlement. The agreement remains subject to court approval and customary conditions; management said it resolves the claims without an admission of liability. The expense reduced quarterly net income by approximately $0.20 per diluted share after tax.
- Other litigation: In the McKeen-Chaplin employment case, the Ninth Circuit reversed a ruling in the Bank’s favor; the Bank petitioned the U.S. Supreme Court for review. A separate Neal class-certification appeal remains pending, and the filing says potential exposure cannot currently be assessed.
- Credit and geographic exposure: Most real-estate-secured loans are concentrated in California. Management cautions that declines in California property values could increase delinquencies, foreclosures, provisions and losses. Restructured loans rose to $4.5 million from $3.6 million, and the share current under modified terms fell to 32% from 46%.
- Funding and interest-rate risks: Cash declined substantially during the quarter as funds supported loan and securities growth and repayment of short-term borrowings. The liquidity ratio was 18.6%, down from 22.1% in the preceding quarter. Management’s model indicates asset sensitivity: a +100 basis-point shock was projected to increase 12-month net interest income 7.34%, while a -100 basis-point shock was projected to reduce it 3.97%. These are model estimates, not forecasts of actual results.
- Other exposures: The company faces mortgage secondary-market and loan-repurchase risks, deposit competition, regulatory and operational risks, and valuation uncertainty in instruments relying on unobservable inputs. Its $305,000 loan-repurchase reserve was unchanged from June 30; management cautioned it may not cover future claims.
- The Board declared a subsequent quarterly dividend of $0.14 per share, payable December 5, 2017. The company also repurchased 126,000 shares during the quarter for approximately $2.45 million.
Important facts for investors to verify
- Whether the Cannon settlement receives court approval and whether related litigation produces further costs or liabilities.
- Whether mortgage origination volumes and loan-sale gains stabilize, and how changes in rates affect margins and mortgage fair-value adjustments.
- Trends in non-performing and restructured loans, classified assets, charge-offs, and the adequacy of the $8.1 million loan-loss allowance.
- Liquidity and funding developments, including cash balances, time-deposit maturities, borrowing capacity and the ability to sustain deposit growth.
- Whether California real-estate conditions, borrower payment resets and concentration in real-estate lending affect credit quality or collateral values.
- Capital, dividend and share-repurchase capacity, including regulatory constraints and the effect of continued distributions on capital and liquidity.