Provident Financial Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2018. The request metadata says “2017 Q3,” but the supplied filing is for fiscal Q3 2018. The filing was signed May 8, 2018. Provident operates community banking and mortgage banking in Southern California.
Financial performance
| Metric | Quarter ended March 31, 2018 | Nine months ended March 31, 2018 |
|---|---|---|
| Net interest income | $9.1 million, up 6% | $27.0 million, up 1% |
| Net income | $1.7 million, up 51% | $731,000, down 83% |
| Diluted earnings per share | $0.23, versus $0.14 | $0.09, versus $0.52 |
| Net interest margin | 3.23%, versus 3.00% | 3.16%, versus 3.06% |
| Non-interest income | $5.2 million, down 24% | $17.3 million, down 28% |
| Non-interest expense | $12.4 million, down 10% | $41.4 million, down 6% |
Quarterly results improved on higher net interest income, a larger loan-loss recovery, and lower compensation and marketing expense; reduced mortgage loan-sale gains partly offset those factors. Nine-month earnings were pressured by lower loan-sale gains, litigation costs, and a tax charge tied to revaluing deferred tax assets after the Tax Cuts and Jobs Act. The nine-month figures include a $3.4 million litigation settlement accrual and a $1.9 million net tax charge; management estimated their respective after-tax effects at approximately $0.24 and $0.25 per diluted share.
Quarterly provision for income taxes was $667,000, with a 27.8% effective rate. The nine-month provision was $2.5 million and the effective rate was 77.6%, including the discrete deferred-tax revaluation charge. Quarterly efficiency ratio was 87%, compared with 89%; the nine-month ratio rose to 93% from 87%.
Financial position, cash flow, and asset quality
- At March 31, 2018, total assets were $1.177 billion, down $24.0 million from June 30, 2017. Deposits were $922.5 million, down $4.0 million; borrowings were $111.2 million, down $15.0 million; and stockholders’ equity was $120.6 million, down $7.6 million.
- Cash and cash equivalents were $50.6 million, down $22.2 million. Investment securities increased $33.9 million to $103.7 million, primarily through held-to-maturity mortgage-backed security purchases.
- Net loans held for investment were $894.2 million, down $10.7 million. Loans held for sale were $89.8 million, down $26.7 million. Transaction accounts increased while time deposits declined, consistent with the stated strategy to favor lower-cost deposits.
- For the nine months, operating cash flow was $32.6 million, investing cash outflow was $26.3 million, and financing cash outflow was $28.5 million. Cash declined by $22.3 million to $50.6 million.
- The allowance for loan losses was $7.5 million, or 0.84% of gross loans held for investment, versus $8.0 million and 0.88% at June 30, 2017. The company recorded a $347,000 recovery for the nine months.
- Non-performing assets were $7.6 million, or 0.64% of assets, down from $9.6 million and 0.80%. Non-performing loans were $6.8 million. Restructured loans increased to $5.4 million from $3.6 million; $3.2 million of the current balance was on non-accrual status.
- Both the holding company and the Bank exceeded regulatory capital requirements; the Bank was categorized as well-capitalized. At the Bank, the Tier 1 leverage ratio was 9.83% and total capital to risk-weighted assets was 17.84%.
Liquidity sources included $286.1 million of remaining FHLB borrowing capacity, $499.0 million of remaining available collateral, a $79.7 million Federal Reserve discount-window facility, and a $17.0 million correspondent-bank federal funds facility. No discount-window or correspondent-facility advances were outstanding at quarter-end. The average liquidity ratio was 16.4% for the quarter, down from 22.1% for the quarter ended June 30, 2017.
Material changes, outlook, and risks
- Mortgage banking slowdown: Nine-month loan-sale volume declined 37% to $915.4 million and net gain on loan sales fell 36% to $12.8 million. Management attributed the decline chiefly to lower refinance and purchase activity. Compensation expense fell with reduced originations and staff levels.
- Business strategy: Management intends to pursue moderate asset growth, increase single-family and higher-yielding preferred lending, and shift deposits toward checking and savings. It cautions that unfavorable economic conditions could prevent growth. Mortgage operations may be adjusted, including staffing, product mix, underwriting, and expenses, in response to market conditions. No quantitative earnings or revenue guidance is provided.
- Interest-rate exposure: The company describes itself as asset-sensitive. Its model projected 12-month net interest income increases of 4.49% to 9.62% under +100 to +400 basis-point shocks, and a 4.91% decrease under a -100 basis-point shock. These are model estimates, not forecasts; management notes assumptions and prepayment behavior can make actual results differ.
- Litigation: The company accrued $3.4 million for settlements of three employment-related lawsuits. The agreements remained subject to court approval and customary conditions at filing; management said no additional contingencies existed regarding the settled matters. Other pending proceedings were not expected by the company to have a material adverse effect.
- Credit and operating risks: The loan portfolio is concentrated in California real estate, exposing results to regional property values, borrower delinquencies, and economic conditions. Other cited risks include interest-rate and funding competition, secondary-market access and loan repurchase claims, regulatory changes, litigation, fair-value estimation, and technology or third-party service disruptions. The recourse reserve for sold loans was $283,000; management warned it might not cover future claims.
- Capital returns: A quarterly dividend of $0.14 per share was declared in April 2018. The board also authorized a new repurchase plan for up to approximately 373,000 shares, effective after completion of the prior plan, which had 40,993 shares remaining at March 31.
Most important facts for investors to verify
- Confirm the period: this filing covers fiscal Q3 2018, notwithstanding the request metadata’s “2017 Q3.”
- Track mortgage origination and sale volumes, gain-on-sale margins, and related fair-value volatility to assess whether the earnings decline persists.
- Assess the final court approval and payment status of the litigation settlements and whether any additional costs arise.
- Review subsequent credit quality, especially restructured and non-performing loans, California collateral exposure, and adequacy of the loan-loss allowance.
- Monitor deposit mix and costs, available liquidity, regulatory capital buffers, and the impact of rising rates on net interest income.
- Check execution and funding of the announced dividend and share-repurchase authorization, including completion of the prior repurchase plan.