Provident Financial Holdings, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended March 31, 2020 (the third quarter of fiscal 2020), not calendar 2019 Q3. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions.
Business context and reporting period
Provident Financial Holdings operates primarily through Provident Savings Bank, a California community bank focused on deposits and residential, multifamily, commercial real estate and other lending. The bank serves customers mainly in Southern California. The filing was signed May 8, 2020.
Financial performance and condition
| Metric | Quarter ended March 31, 2020 | Nine months ended March 31, 2020 |
|---|---|---|
| Net interest income | $8.9 million | $28.1 million |
| Provision for loan losses | $874,000 | $671,000 |
| Non-interest income | $1.1 million | $3.5 million |
| Non-interest expense | $7.5 million | $22.3 million |
| Net income | $1.1 million; diluted EPS $0.15 | $6.1 million; diluted EPS $0.80 |
| Net interest margin | 3.30% | 3.51% |
| Efficiency ratio | 75% | 71% |
- Compared with the same 2019 periods, quarterly net income improved from a $151,000 loss and nine-month net income rose 68% from $3.6 million. Nine-month diluted EPS increased from $0.48.
- Quarterly net interest income declined 8% year over year, and margin contracted 23 basis points. Nine-month net interest income declined 2%, while margin rose six basis points.
- Non-interest income fell 64% for the quarter and 69% year to date, primarily because there were no loan sales in fiscal 2020; comparable 2019 periods included substantial saleable mortgage activity. Non-interest expense fell 42% and 37%, respectively, largely reflecting the scale-back of that business, reduced staffing and closed loan production offices.
- Cash and cash equivalents were $84.3 million at March 31, 2020, up from $70.6 million at June 30, 2019. Nine-month operating cash flow was $3.9 million, versus $72.2 million a year earlier; investing used $10.6 million and financing provided $20.3 million.
- Total assets were $1.108 billion, up 2% from June 30, 2019. Net loans held for investment were $914.3 million, up 4%; deposits were $835.8 million, down $5.4 million. Borrowings increased 30% to $131.1 million.
- Stockholders’ equity was $123.2 million. The allowance for loan losses was $7.8 million, or 0.85% of gross loans, compared with $7.1 million and 0.80% at June 30, 2019.
- Non-performing loans were $3.6 million, or 0.40% of loans, down from $6.2 million, or 0.71%, at June 30, 2019. Classified loans totaled $15.1 million. No real estate owned was reported.
- The bank reported regulatory capital ratios of 10.36% Tier 1 leverage, 17.26% CET1 and 18.45% total capital, and was categorized as well-capitalized. Cash was 8% of assets; remaining FHLB borrowing capacity was reported at $244.1 million, with no advances under the Federal Reserve discount-window or correspondent-bank facilities.
Material changes versus comparable periods
- The company had no loans originated for sale or loan sales in the first nine months of fiscal 2020, compared with $453.4 million originated for sale and $516.0 million sold in the comparable 2019 period. Loan-sale income shifted from a $7.1 million gain to a $115,000 loss year to date.
- Management attributed the expense reduction to its earlier decision to scale back saleable single-family mortgage originations. Average full-time-equivalent employees fell 39% year over year, to 183 from 298 at March 31, 2019; ten loan production offices and one retail banking center had been closed.
- Loans held for investment grew primarily through multifamily lending. The bank originated $88.3 million and purchased $115.6 million of investment loans during the nine months.
- Loan-sale premium refunds from early payoffs contributed to the year-to-date loan-sale loss. A $296,000 recovery of a previously recorded legal settlement expense was recognized during the first quarter of fiscal 2020.
Outlook, risks and unusual items
- No specific numerical earnings or revenue guidance was provided. Management expects COVID-19 and the Federal Reserve’s rate cuts to pressure net interest income and net interest margin during 2020 and possibly longer. It cautioned that the pandemic’s financial impact was uncertain and could be materially adverse.
- COVID-19 drove a new qualitative allowance factor and the quarterly loan-loss provision. Management warned that further economic deterioration could increase delinquencies, classified loans, charge-offs and required reserves.
- As of April 30, 2020, the company had processed approximately 27 eligible single-family forbearance requests totaling $12.9 million and about four multifamily, commercial real estate and business requests totaling $4.3 million. It reported no COVID-related short-term loan modifications as of March 31.
- Other identified pandemic exposures include lower loan demand and fees, possible borrower defaults, deposit competition, operating-cost increases, cybersecurity and vendor-continuity risks, and exposure to California real estate values. The portfolio is concentrated in California real estate lending.
- On April 30, 2020, the board declared a $0.14-per-share dividend, payable June 11, and authorized a new one-year repurchase program for up to approximately 371,815 shares. These were subsequent events, not March 31 balances.
- The filing says disclosure controls were effective at a reasonable-assurance level and reports no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How COVID-era borrower relief requests, payment performance after deferrals and economic conditions affect delinquencies, classifications and the allowance for loan losses.
- Whether reduced asset yields and lagging deposit repricing produce the expected pressure on net interest margin and earnings.
- Whether expense savings from the mortgage-business scale-back are sustainable, given the sharp decline in loan-sale income and the legal settlement recovery.
- Funding and liquidity trends, including deposit stability, reliance on FHLB advances, time-deposit maturities and the reported unused borrowing capacity.
- The effect of the new share-repurchase authorization and continuing dividends on capital and liquidity; the bank’s regulatory capital position and restrictions on distributions should also be monitored.
- The filing metadata supplied with the request labels the period “2019 Q3,” but the filing itself clearly reports the quarter ended March 31, 2020.