Provident Financial Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended December 31, 2018 (the second quarter and first half of fiscal 2019; not calendar Q2 2018). Provident operates community banking through Provident Savings Bank and mortgage banking through Provident Bank Mortgage (PBM), primarily in Southern California. Unless stated otherwise, financial amounts below are in millions of dollars.
Key financial metrics
| Metric | Quarter ended Dec. 31, 2018 | Comparable 2017 quarter | Six months ended Dec. 31, 2018 | Comparable 2017 six months |
|---|---|---|---|---|
| Net interest income | $9.831 | $8.751 | $19.188 | $17.869 |
| Net income (loss) | $1.958 | $(0.777) | $3.781 | $(1.002) |
| Diluted EPS | $0.26 | $(0.10) | $0.50 | $(0.13) |
| Non-interest income | $3.595 | $5.741 | $8.144 | $12.093 |
| Non-interest expense | $10.875 | $13.213 | $22.579 | $28.947 |
- Quarterly net interest margin was 3.54%, up 46 basis points year over year; first-half margin was 3.42%, up 30 basis points. The quarter included $159,000 of previously unrecognized interest on loans paid off and a $133,000 special FHLB stock dividend.
- Quarterly efficiency ratio improved to 81% from 91%; first-half ratio improved to 83% from 97%.
- At December 31, total assets were $1.127 billion, down 4% from June 30, 2018. Net loans held for investment were $875.4 million; loans held for sale were $57.6 million. Cash and cash equivalents were $67.4 million.
- Deposits totaled $872.9 million, down 4% from June 30; borrowings were $111.1 million, down 12%. Stockholders’ equity was $122.7 million. The Bank was classified as well-capitalized; its Tier 1 leverage ratio was 9.96% and total risk-based capital ratio was 18.26%.
- For the six months, operating cash flow was $45.2 million, investing cash flow was $31.3 million, and financing cash flow was $(52.4) million. Cash increased $24.1 million to $67.4 million. Financing outflows included deposit reductions, borrowing repayments, and $2.1 million of dividends.
- Asset quality: allowance for loan losses was $7.1 million, or 0.80% of gross loans held for investment. Non-performing assets were $6.1 million, or 0.54% of assets, versus $7.0 million, or 0.59%, at June 30. No real estate owned remained at quarter-end.
Material changes versus the prior comparable period
- Profitability returned to positive territory, but comparisons were affected by prior-year unusual items: a $1.8 million non-cash tax charge from Tax Act deferred-tax remeasurement and litigation settlement expense of $650,000 in the quarter and $3.4 million in the six-month period. Neither item recurred in the current periods.
- Net interest income rose, while non-interest income fell sharply as lower mortgage production reduced loan-sale gains: quarterly gains declined to $2.3 million from $4.3 million; six-month gains declined to $5.4 million from $9.2 million.
- Mortgage loan-sale volume fell 54% in both the quarter and first half compared with prior-year periods. Lower mortgage activity also contributed to lower salaries and benefits expense and fewer PBM employees.
- Loans held for investment declined 3% from June 30, mainly due to a $29.0 million reduction in multifamily loans. Deposits declined 4%, consistent with the company’s plan to reduce reliance on time deposits; borrowings also decreased.
Outlook, commentary, risks, and unusual items
- No formal full-year earnings guidance is provided. Management described a strategy of moderate community-banking growth, more higher-yielding loans, and a deposit mix with more lower-cost transaction accounts.
- On February 4, 2019, after quarter-end, the Board decided to exit PBM’s mortgage banking operations by June 30, 2019. The company estimated $3.6 million to $4.0 million of one-time costs during the remainder of fiscal 2019. It anticipates eliminating quarterly pretax mortgage-segment losses of about $1.6 million, based on the second quarter, and increasing community-banking pretax income by about $1.2 million per quarter; management cautioned these benefits are uncertain and may not be realized on the expected timetable.
- The Bank announced closure of its La Quinta branch effective May 10, 2019, with estimated annual operating savings of about $473,000 and one-time charges of about $18,000.
- Key risks include California real-estate and credit exposure, interest-rate and deposit competition, mortgage-market and loan-sale volatility, loan repurchase claims, regulatory actions, and potential execution costs or delays in exiting mortgage banking. Management noted the loan-loss allowance is based on estimates and may need to increase.
- During the first half, the company repurchased three sold loans totaling $253,000, including two fully charged off for $25,000; the recourse reserve was $250,000. The company warned that future investor repurchase claims could exceed reserves.
- Legal settlements were distributed in two class/collective actions, subject to a court compliance hearing; another settlement remained subject to court approval. The filing reported no other material changes to previously disclosed proceedings.
- The company adopted the customer-revenue standard on July 1, 2018 with no material change to revenue recognition. It planned to adopt the new lease standard on July 1, 2019; management did not expect a material impact but was still assessing it.
Important facts for investors to verify
- Confirm the timetable, costs, staffing actions, and realized earnings effects of the PBM exit against the estimates disclosed after quarter-end.
- Track community-banking performance and whether expected mortgage-exit benefits offset lost mortgage revenue and one-time costs.
- Monitor multifamily and other California real-estate exposure, non-performing and restructured loans, and allowance adequacy.
- Assess deposit trends, funding costs, liquidity access, and capital ratios as the balance sheet and business mix change.
- Reconcile earnings comparisons for the prior-year tax revaluation and litigation expenses, and assess how much current-period margin benefited from non-recurring loan interest and the FHLB dividend.