Provident Financial Holdings, Inc. — FY2020 Form 10-K
Period note: The filing is for the fiscal year ended June 30, 2020, with comparative results for the year ended June 30, 2019; it is not a filing for calendar 2019 Q4. The company is a bank holding company operating primarily through Provident Savings Bank in Southern California’s Inland Empire.
Financial results and position
| Metric | FY2020 / June 30, 2020 | FY2019 / June 30, 2019 |
|---|---|---|
| Net income | $7.7 million; diluted EPS $1.01 | $4.4 million; diluted EPS $0.58 |
| Net interest income | $36.4 million | $38.2 million |
| Net interest margin | 3.36% | 3.47% |
| Non-interest income | $4.5 million | $12.5 million |
| Non-interest expense | $28.9 million | $45.2 million |
| Provision (recovery) for loan losses | $1.1 million provision | $475,000 recovery |
| Total assets | $1.177 billion | $1.085 billion |
| Deposits | $893.0 million | $841.3 million |
| FHLB borrowings | $141.0 million | $101.1 million |
| Stockholders’ equity | $124.0 million | $120.6 million |
| Cash and cash equivalents | $116.0 million | $70.6 million |
- Net income rose 75%. The principal driver was a $16.3 million reduction in operating expenses following the scale-back of saleable single-family mortgage originations; lower loan-sale income, net interest income and higher loan-loss provisioning partly offset the benefit.
- Net interest income fell 5%, and margin declined 11 basis points as yields on earning assets decreased. Total interest income was $42.5 million versus $44.4 million; interest expense was $6.1 million versus $6.2 million.
- Non-interest income fell 64%, chiefly because the company had no loan-sale volume in FY2020, compared with $559.0 million of sales in FY2019. Net gain on loan sales shifted from $7.1 million to a $132,000 loss.
- Non-interest expense declined 36%. FY2019 included costs related to winding down mortgage production, including $11.4 million of related salaries and benefits and other one-time closure and contract costs.
- Operating cash flow was $8.0 million, compared with $107.1 million in FY2019. The prior-year figure included substantial loan-sale activity; FY2020 had no loans originated for sale or loans sold. Investing cash flow was negative $48.9 million and financing cash flow was positive $86.4 million.
- Net loans held for investment grew 3% to $902.8 million. Multifamily loans increased to $491.9 million; single-family loans declined to $298.8 million. Multifamily and commercial real estate represented approximately 66% of gross loans.
- The allowance for loan losses increased to $8.3 million, or 0.91% of gross loans, from $7.1 million, or 0.80%. Nonperforming assets declined to $4.9 million, or 0.42% of assets, from $6.2 million, or 0.57%.
- Deposits grew 6%; transaction accounts rose to 81% of deposits from 77%, while time deposits declined 12%. FHLB advances increased 39% to $141.0 million, with a 2.23% period-end weighted-average rate.
- Liquidity included $116.0 million of cash, $228.1 million of remaining FHLB borrowing availability, a $94.4 million Federal Reserve discount-window facility and a $17.0 million correspondent-bank facility; there were no outstanding discount-window or correspondent borrowings.
- The Bank was classified as well-capitalized. At June 30, 2020, Tier 1 leverage, CET1, Tier 1 risk-based and total capital ratios were 10.13%, 17.51%, 17.51% and 18.76%, respectively.
Material changes and business developments
- The company continued its 2019 decision to reduce saleable single-family mortgage originations and focus on portfolio lending. It originated no loans for sale in FY2020, versus $467.1 million in FY2019, and sold no loans, versus $559.0 million.
- Purchases of loans held for investment increased to $142.1 million from $51.1 million, while originations for investment declined to $106.0 million from $120.2 million.
- Assets increased 9%, driven mainly by higher cash, securities and loans. Deposits increased $51.7 million, and borrowings rose $39.9 million.
- During FY2020 the company repurchased 66,041 shares at an average $19.43 per share. It paid $0.56 per share in dividends during the year. A subsequent $0.14-per-share dividend was declared July 30, 2020, payable September 10, 2020.
Outlook, risks and unusual items
- Management’s longer-term strategy is moderate asset and loan growth, a greater share of lower-cost checking and savings deposits, and improved core revenue and net interest margin. It cautioned that growth may be difficult under weak economic conditions.
- Management expected COVID-19 and very low interest rates to adversely affect net interest income and net interest margin during 2020 and possibly longer. The filing says the pandemic’s full financial impact was uncertain and not then estimable.
- At June 30, 2020, 53 loans totaling $22.6 million remained in COVID-related forbearance, mainly single-family loans; this was 2.49% of total loans. Seven additional single-family relief requests totaling approximately $2.6 million were pending. Deferred amounts generally become due as a balloon payment at loan maturity or earlier payoff.
- The $1.1 million loan-loss provision included a qualitative reserve for COVID-19’s expected economic effects. Management warned that further deterioration could increase delinquencies, criticized loans, charge-offs and required reserves.
- Key exposures include concentration in California real estate lending, especially multifamily and commercial real estate; borrower and collateral stress from the pandemic; interest-rate and funding-cost changes; adjustable-rate loan performance; and transition away from LIBOR, which underlies many portfolio loans.
- The Bank did not participate in the Paycheck Protection Program. The filing reports no pending legal proceeding believed likely to have a material adverse effect. A wage-and-hour class settlement was finalized in FY2020 for $2.5 million, producing a $296,000 expense recovery after a higher prior-year accrual.
- The company adopted lease accounting during FY2020, recording $2.5 million of operating lease right-of-use assets and $2.6 million of lease liabilities at year-end. CECL adoption was deferred to fiscal years beginning after December 15, 2022; management anticipated a one-time increase to the allowance upon adoption but had not estimated its amount.
Investor verification priorities
- Verify the filing period and use the full audited statements and notes: this is FY2020, not calendar 2019 Q4.
- Track COVID-19 forbearance exits, pending relief requests, borrower payment performance and subsequent changes in criticized loans and credit-loss reserves.
- Assess whether the sharp expense reduction is sustainable and how earnings evolve without loan-sale gains, given the shift to portfolio lending.
- Monitor net interest margin, deposit pricing and mix, FHLB funding reliance, liquidity facilities and regulatory capital under prolonged low rates or economic stress.
- Review concentration and credit performance in California multifamily and commercial real estate, and the company’s exposure to LIBOR transition and future CECL impacts.