Business context and reporting period
Provident Financial Holdings, Inc. is the holding company for Provident Savings Bank, a California community bank focused mainly on real-estate lending and deposits. This Form 10-Q covers the quarter ended September 30, 2019, the first quarter of fiscal 2020 (not calendar 2019 Q1). Unless otherwise noted, dollar amounts are in millions.
Financial performance and condition
- Earnings: Net income was $2.56 million, up 41% from $1.82 million a year earlier. Diluted EPS increased to $0.33 from $0.24. Pretax income was $3.60 million; income-tax expense was $1.03 million.
- Interest income and margins: Net interest income rose 2% to $9.58 million. Net interest margin increased to 3.64% from 3.30%; interest income was $11.08 million and interest expense $1.50 million.
- Other income and costs: Non-interest income fell 76% to $1.07 million, principally because loan-sale results shifted from a $3.13 million gain to an $86,000 loss. Non-interest expense declined 38% to $7.24 million. The efficiency ratio improved to 68% from 84%.
- Returns and dividend: Return on average assets was 0.95% versus 0.63%; return on average equity was 8.46% versus 6.03%. The quarterly dividend was $0.14 per share in both comparable quarters; a further $0.14 dividend was declared for payment December 11, 2019.
- Balance sheet: Total assets were $1.105 billion, up $20.4 million from June 30, 2019. Net loans held for investment were $924.3 million, up $44.4 million (5%), including $40.6 million growth in multifamily loans. Deposits declined $9.5 million to $831.7 million; borrowings rose $30.0 million to $131.1 million. Stockholders’ equity was $122.2 million.
- Credit quality: The allowance for loan losses was $6.93 million, or 0.74% of gross loans, and the quarter included a $181,000 provision recovery. Non-performing loans, net of allowance and fair-value adjustments, declined to $5.23 million from $6.22 million at June 30; non-performing assets were 0.47% of total assets. Classified loans fell to $13.0 million from $16.2 million.
- Cash flow and liquidity: Operating cash flow was negative $0.21 million; investing cash flow was negative $35.07 million and financing cash flow positive $19.16 million. Cash and equivalents declined $16.12 million to $54.5 million. Management reported $233.1 million of remaining FHLB borrowing capacity and a $63.1 million Federal Reserve discount-window facility, unused at quarter-end. The Bank was categorized as well-capitalized; its CET1, Tier 1 risk-based, total risk-based and leverage ratios were 16.32%, 16.32%, 17.37% and 10.21%, respectively.
Material changes versus comparable periods
Year-over-year earnings improved despite sharply lower non-interest income: the prior-year quarter included $3.13 million in net loan-sale gains, while there was no loan-sale volume in the current quarter. Management attributed lower expenses primarily to scaling back saleable single-family mortgage lending, staff reductions and closure of loan-production offices. Full-time equivalent employees fell 48% to 188. Quarter-end loans held for investment rose from June, supported by $30.2 million of originations and $63.2 million of loan purchases; there were no loans originated for sale in the quarter.
Compared with June 30, cash and investment securities declined as funds supported loan growth, while borrowings increased. Deposits decreased modestly. The Bank’s average liquidity ratio was 15.7%, down from 20.7% in the preceding quarter.
Outlook, commentary, risks and unusual items
- Management intends to pursue moderate asset and loan growth, increase portfolio single-family lending, and shift deposits toward lower-cost checking and savings accounts while reducing the share of time deposits. These plans are subject to market conditions; no numerical earnings or growth guidance was provided.
- The Bank scaled back saleable single-family mortgage originations, with no loans originated for sale during the quarter. Management said this strategy reduced related staffing and office costs.
- Key stated risks include credit exposure to California real estate, interest-rate and funding sensitivity, loan demand and prepayments, the secondary market for loans, regulatory changes, competition, operating costs, and technology or third-party service disruptions. Management cautioned that interest-rate and net portfolio value models depend on assumptions and may not predict actual results.
- The Cannon v. Bank settlement received final approval; the settlement was reduced from $2.8 million to $2.5 million, producing a $296,000 expense recovery in the quarter. No material change in other previously disclosed legal proceedings or risk factors was reported.
- The company adopted lease-accounting guidance on July 1, 2019. It recorded $3.17 million of operating lease right-of-use assets and $3.38 million of lease liabilities at September 30; adoption was reported as not having a material impact on the financial statements.
- The company is evaluating the expected-credit-loss accounting standard, with adoption expected for fiscal years beginning after December 15, 2022 under the extension described in the filing. The potential impact remains under evaluation.
Important facts for investors to verify
- Whether loan growth and the improved net interest margin can persist as interest rates and funding costs change.
- Whether earnings remain resilient without loan-sale gains and after temporary settlement and FDIC assessment credits; the quarter included a $296,000 settlement expense recovery and an FDIC assessment credit.
- Credit performance and allowance adequacy, particularly in California real estate, construction and multifamily exposures; management notes collateral values and loan-to-value estimates may not reflect current values.
- Liquidity and funding trends, including continued deposit flows, reliance on FHLB advances and the decline in the liquidity ratio.
- Execution of the strategic shift in mortgage originations, related staffing and branch/office changes, and the effect on recurring revenue and costs.
- Dividend capacity and capital: the Bank reported regulatory capital above required levels, but dividend payments remain subject to regulatory and other constraints.