Provident Financial Holdings, Inc. — Q2 FY2012 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2011. Unaudited results; dollar figures below are in millions unless stated otherwise. The company operates community banking and mortgage banking businesses, primarily in Southern California.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2011 | Prior-year quarter | Six months ended Dec. 31, 2011 | Prior-year six months |
|---|---|---|---|---|
| Net interest income, before provision | $9.5 | $9.7 | $18.3 | $19.5 |
| Provision for loan losses | $1.1 | $1.0 | $2.1 | $1.9 |
| Non-interest income | $7.3 | $10.1 | $15.9 | $20.4 |
| Non-interest expense | $12.5 | $11.3 | $24.8 | $22.6 |
| Net income | $1.9 | $4.3 | $4.2 | $8.8 |
| Diluted EPS | $0.16 | $0.37 | $0.36 | $0.77 |
| Net interest margin | 3.02% | 2.96% | 2.90% | 2.95% |
| Efficiency ratio | 74% | 57% | 73% | 56% |
- Balance sheet at Dec. 31: Assets $1,298.6; deposits $953.9; borrowings $176.6; equity $142.9; cash and equivalents $133.5. Since June 30, assets declined $16.0, deposits rose $8.1, borrowings fell $30.0 and equity rose $1.1.
- Loans and credit: Loans held for investment, net, were $845.5, down 4% from June 30; loans held for sale were $226.8, up 18%. Allowance for loan losses was $26.9, or 3.08% of gross held-for-investment loans, versus $30.5 and 3.34% at June 30.
- Cash flow, six months: Operating activities used $20.8; investing activities provided $37.5; financing activities used $25.7. Cash and equivalents declined $9.0 to $133.5.
- Liquidity and capital: Cash equaled 10% of assets; the quarterly average liquidity ratio was 38.0%. The Bank reported remaining FHLB borrowing capacity of $269.3 and no borrowing under its $21.3 Federal Reserve discount-window facility. The Bank exceeded “well capitalized” thresholds: total risk-based capital 18.21% and Tier 1 risk-based capital 16.96%.
- Credit quality: Non-performing loans were $31.5, down from $37.1 at June 30; non-performing assets were $39.3, or 3.03% of assets, versus $45.5 and 3.46%. Restructured loans totaled $30.5, down from $39.2; $13.3 were on non-accrual status.
Changes and management commentary
- Net income fell 56% for the quarter and 52% for the six-month period. Management attributed the declines chiefly to lower gains on loan sales and higher non-interest expense; six-month performance also reflected lower net interest income.
- Quarterly loan-sale gains fell 37% to $5.9; the average mortgage loan-sale margin declined to 1.14% from 1.72%. Six-month loan-sale gains fell 30% to $13.2, while loan sales declined 9% to $1.16 billion.
- Quarterly net interest income before provision declined 2%, although the quarterly margin improved six basis points. The six-month margin declined five basis points as asset yields fell more than funding costs.
- Management’s strategy includes moderate asset growth, a lower single-family concentration and more higher-yielding preferred loans, alongside growth in lower-cost transaction deposits. It cautioned that the balance sheet may decline or stabilize amid economic weakness.
- The filing gives no specific earnings or financial guidance. Management said results for the quarter are not necessarily indicative of full-year results and described the mortgage market as volatile despite low rates and loan demand.
Risks, contingencies and notable items
- Credit risk remains sensitive to California real estate values, unemployment and borrower delinquencies. The filing notes that current loan-to-value ratios have not been broadly refreshed and may understate current leverage. Negative-amortization loans totaled $46.5; interest-only adjustable-rate loans were $229.6.
- The reserve for loan-sale repurchase/recourse claims was $5.3, up from $4.2 at June 30. The Bank repurchased four loans totaling $1.3 during the six months and cited continuing uncertainty, particularly for loans originated and sold in 2004–2007.
- Quarterly results included a $672,000 provision for loan-sale recourse claims and unfavorable derivative fair-value movements; derivative values can add volatility to mortgage banking earnings. The filing also warns that fair-value estimates and allowance assumptions may differ from actual outcomes.
- Subsequent events: the Bank announced a planned La Quinta branch, subject to approvals; hired a mortgage banking group expected to open three California production offices; and declared a $0.04-per-share dividend payable March 9, 2012.
- Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting. Ordinary-course legal proceedings were not considered material; no material risk-factor changes were reported.
Important facts for investors to verify
- Whether credit quality and non-performing asset trends continue to improve, and whether the $26.9 loan-loss allowance remains adequate.
- Future loan-sale volumes and margins, and the adequacy of the $5.3 recourse reserve against investor repurchase claims.
- How lower rates, loan repricing and deposit mix affect net interest margin, earnings and liquidity.
- Exposure to Southern California property markets, including the value and performance of interest-only and negative-amortization loans.
- Execution costs and results from planned branch and mortgage-office expansion, and the Bank’s capacity to support shareholder dividends while maintaining regulatory capital.