Brief Overview on Company’s Performance: Provident Financial Holdings, Inc. (NASDAQ: PROV)

On Friday, Shares of Provident Financial Holdings, Inc. (NASDAQ: PROV) lost -0.49% to $18.34. The stock opened its trade at $18.26 and after floating in a price range of $18.26 to $18.54; the stock grabbed the investor’s attention and traded 8,105 shares as compared to its average daily volume of 14.17K shares. The stock’s institutional ownership stands at 61.50%.

Provident Financial Holdings, Inc., (PROV) the holding company for Provident Savings Bank, F.S.B., recently declared second quarter results for the fiscal year ending June 30, 2018.

For the quarter ended December 31, 2017, the Company stated a net loss of $777.0K, or $(0.10) per diluted share (on 7.570M average diluted shares outstanding), a decrease of 152 percent from net income of $1.500M, or $0.18 per diluted share (on 8.150M average diluted shares outstanding), in the comparable period a year ago.  The current quarter results were influenced by a one-time, non-cash, net tax charge of $1.840M, or $(0.24) per diluted share, from the net deferred tax assets revaluation required by the newly enacted Tax Cuts and Jobs Act consistent with the lower corporate tax rates adopted; and a $650.0K litigation reserve which, net of tax benefit, reduced net results by about $(0.06) per diluted share. Contrast to the same quarter last year, the decrease in results was mainly attributable to a decrease in the gain on sale of loans, a decline in the recovery from the allowance for loan losses, lower net interest income and a boost in the provision for income taxes, partly offset by a decrease in salaries and employee benefits expense.

On a sequential quarter basis, the net loss for the second quarter of fiscal 2018 reflects a $552.0K, or 245 percent, increase from the net loss of $(225.0K) in the first quarter of fiscal 2018.  The decrease in the second quarter of fiscal 2018 results contrast to the first quarter of fiscal 2018 was mainly attributable to a $2.280M increase in the provision for income taxes, a $530.0K decrease in the gain on sale of loans, and a $367.0K decrease in net interest income, partly offset by a $2.00M reduction in other non-interest expense because of lower litigation settlement expense and a $636.0K decrease in salaries and employee benefits expense.  Diluted earnings per share for the second quarter of fiscal 2018 were $(0.10) per share, down 233 percent, from the $(0.03) per share during the first quarter of fiscal 2018.  Return on average assets reduced to (0.27) percent for the second quarter of fiscal 2018 from (0.08) percent in the first quarter of fiscal 2018; and return on average stockholders’ equity for the second quarter of fiscal 2018 was (2.50) percent, contrast to (0.70) percent for the first quarter of fiscal 2018.

For the six months ended December 31, 2017, results reduced $4.10M, or 132 percent, to a net loss of $1.00M from net income of $3.10M in the comparable period ended December 31, 2016; and diluted earnings per share for the six months ended December 31, 2017 reduced 134 percent to $(0.13) per share (on 7.63M average diluted shares outstanding) from $0.38 per share (on 8.15M average diluted shares outstanding) for the comparable six month period last year.

Net interest income reduced to $8.75M in the second quarter of fiscal 2018 from $9.09M for the same quarter of fiscal 2017, attributable to a lower average interest-earning assets balance, and to a lesser extent, a decrease in the net interest margin. The average balance of interest-earning assets reduced by $36.70M, or three percent, to $1.14B in the second quarter of fiscal 2018 from $1.18B in the same quarter last year. The net interest margin during the second quarter of fiscal 2018 reduced one basis point to 3.08 percent from 3.09 percent in the same quarter last year, mainly because of a decrease in the average yield of earning assets, partly offset by a decrease in the average cost of costing liabilities. The average yield on interest-earning assets reduced by four basis points to 3.64 percent in the second quarter of fiscal 2018 from 3.68 percent in the same quarter last year and the average cost of liabilities reduced by two basis points to 0.62 percent in the second quarter of fiscal 2018 from 0.64 percent in the same quarter last year.

The average balance of loans receivable, counting loans held for sale, reduced by $59.50M, or six percent, to $990.90M in the second quarter of fiscal 2018 from $1.05B in the same quarter of fiscal 2017, mainly because of a decrease in average loans held for sale attributable to a decrease in mortgage banking activity, which was partly offset by a boost in average loans held for investment.  The average yield on loans receivable increased eight basis points to 3.93 percent in the second quarter of fiscal 2018 from an average yield of 3.85 percent in the same quarter of fiscal 2017.  The increase in the average loan yield was mainly attributable to a boost in the average yield of loans held for investment and a boost in the average yield of loans held for sale with a lower percentage of loans held for sale to total loans receivable.  The average balance of loans held for investment in the second quarter of fiscal 2018 was $890.20M with an average yield of 3.93 percent, up from $853.30M with an average yield of 3.91 percent in the same quarter of fiscal 2017; while the average balance of loans held for sale in the second quarter of fiscal 2018 was $100.70M with an average yield of 3.91 percent, down from $197.10M with an average yield of 3.59 percent in the same quarter of fiscal 2017. The outstanding balance of “preferred loans” (multi-family, commercial real estate, construction and commercial business loans) reduced by $10.40M, or two percent, to $574.70M at December 31, 2017 from $585.10M at June 30, 2017, net of undisbursed loan funds of $7.40M and $9.00M, respectively. The percentage of preferred loans to total loans held for investment at December 31, 2017 increased to 65 percent from 64 percent at June 30, 2017.  Loan principal payments received in the second quarter of fiscal 2018 were $57.40M, contrast to $54.70M in the same quarter of fiscal 2017.

The average balance of investment securities increased by $43.00M, or 94 percent, to $88.60M in the second quarter of fiscal 2018 from $45.60M in the same quarter of fiscal 2017.  The increase was attributable to mortgage-backed securities purchases, partly offset by principal payments received on mortgage-backed securities.  The average yield on investment securities increased 32 basis points to 1.44 percent in the second quarter of fiscal 2018 from 1.12 percent for the same quarter of fiscal 2017.  The increase in the average yield was mainly attributable to mortgage-backed securities purchases which had higher average yields than the existing portfolio and the repricing of variable rate investment securities to higher market interest rates.

In the second quarter of fiscal 2018, the Federal Home Loan Bank (“FHLB”) – San Francisco distributed $143.0K of quarterly cash dividends to the Bank, a $315.0K or 69 percent decrease from the cash dividends received by the Bank in the same quarter last year.  The cash dividends distributed in the second quarter of last year included a special cash dividend, not replicated in the second quarter of fiscal 2018.

The average balance of the Company’s interest-earning deposits, mainly cash with the Federal Reserve Bank of San Francisco, reduced $20.30M, or 29 percent, to $50.70M in the second quarter of fiscal 2018 from $71.00M in the same quarter of fiscal 2017. The decrease in interest-earning deposits was mainly because of funding the increase in loans held for investment and purchases of investment securities. The average yield earned on interest-earning deposits in the second quarter of fiscal 2018 was 1.30 percent, up 74 basis points from 0.56 percent in the same quarter of fiscal 2017 as a result of the impact of the increases in the federal funds rate over the last year.

Average deposits reduced $23.10M, or two percent, to $916.20M in the second quarter of fiscal 2018 from $939.30M in the same quarter of fiscal 2017.  The average cost of deposits reduced by three basis points to 0.38 percent in the second quarter of fiscal 2018 from 0.41 percent in the same quarter last year, mainly because of a lower percentage of time deposits to the total deposit balance. Transaction account balances or “core deposits” increased $2.10M to $660.70M at December 31, 2017 from $658.60M at June 30, 2017, while time deposits reduced $20.70M, or eight percent, to $247.10M at December 31, 2017 from $267.90M at June 30, 2017, consistent with the Bank’s strategy to decrease the percentage of time deposits in its deposit base and to increase the percentage of lower cost checking and savings accounts.

The average balance of borrowings, which consisted of FHLB – San Francisco advances, reduced $8.00M, or seven percent, to $111.50M while the average cost of advances increased 15 basis points to 2.59 percent in the second quarter of fiscal 2018, contrast to an average balance of $119.50M with an average cost of 2.44 percent in the same quarter of fiscal 2017.  The increase in the average cost of advances was mainly because of the maturity of short-term advances in the second quarter of fiscal 2017 with a cost well below the weighted average cost of existing advances.

During the second quarter of fiscal 2018, the Company recorded a recovery from the allowance for loan losses of $11.0K, contrast to the recovery from the allowance for loan losses of $350.0K recorded during the same period of fiscal 2017 and the provision for loan losses of $169.0K recorded in the first quarter of fiscal 2018 (sequential quarter).  The recovery from the allowance for loan losses was mainly attributable to the decrease in loans held for investment during the second quarter of fiscal 2018.

Non-performing assets, with underlying collateral located in California, reduced $1.00M, or 10 percent, to $8.60M, or 0.74 percent of total assets, at December 31, 2017, contrast to $9.60M, or 0.80 percent of total assets, at June 30, 2017.  Non-performing loans at December 31, 2017 were unchanged from June 30, 2017 at $8.00M and were mainly comprised of 29 single-family loans ($7.90M) and one commercial business loan ($61.0K).  At December 31, 2017, there was $621.0K of real estate owned outstanding comprised of one single-family property which was attained during the second quarter, while two single-family real estate owned properties, totaling $1.60M at June 30, 2017, were sold during the first quarter of fiscal 2018.

Net loan recoveries for the quarter ended December 31, 2017 were $23.0K or (0.01) percent (annualized) of average loans receivable, contrast to net loan recoveries of $16.0K or (0.01) percent (annualized) of average loans receivable for the quarter ended December 31, 2016 and net loan charge-offs of $145.0K or 0.06 percent (annualized) of average loans receivable for the quarter ended September 30, 2017 (sequential quarter).

Classified assets at December 31, 2017 were $13.80M, comprised of $3.60M of loans in the special mention category, $9.60M of loans in the substandard category and $621.0K in real estate owned.  Classified assets at June 30, 2017 were $13.30M, comprised of $3.70M of loans in the special mention category, $8.00M of loans in the substandard category and $1.60M in real estate owned.  For the quarter ended December 31, 2017, no loans were restructured from their original terms or newly classified as a restructured loan.

The allowance for loan losses was $8.10M at December 31, 2017, or 0.90 percent of gross loans held for investment, contrast to $8.00M at June 30, 2017, or 0.88 percent of gross loans held for investment.  Management believes that, based on presently available information, the allowance for loan losses is sufficient to absorb potential losses inherent in loans held for investment at December 31, 2017.

Non-interest income reduced by $2.09M, or 27 percent, to $5.74M in the second quarter of fiscal 2018 from $7.83M in the same period of fiscal 2017, mainly as a result of a decrease in the gain on sale of loans during the current quarter as contrast to the comparable period last year.  On a sequential quarter basis, non-interest income reduced $611.0K, or 10 percent, mainly as a result of a decrease in the gain on sale of loans.

The gain on sale of loans reduced $2.16M, or 33 percent, to $4.32M for the quarter ended December 31, 2017 from $6.48M in the comparable quarter last year, and reduced $530,000 or 11 percent from the quarter ended September 30, 2017 (sequential quarter), reflecting the impact of a lower loan sale volume, partly offset by a higher average loan sale margin.  Total loan sale volume, which includes the net change in commitments to extend credit on loans to be held for sale, was $287.80M in the quarter ended December 31, 2017, down $175.40M or 38 percent, from $463.20M in the comparable quarter last year and reduced $104.40M or 27 percent from the quarter ended September 30, 2017 (sequential quarter).  The average loan sale margin from mortgage banking was 149 basis points for the quarter ended December 31, 2017, up 10 basis points from 139 basis points in the same quarter last year and up 25 basis points from 124 basis points in the first quarter of fiscal 2018 (sequential quarter).  The gain on sale of loans includes an unfavorable fair-value adjustment on loans held for sale and derivative financial instruments (commitments to extend credit, commitments to sell loans, commitments to sell mortgage-backed securities, and option contracts) that amounted to a net loss of $1.30M in the second quarter of fiscal 2018, contrast to an unfavorable fair-value adjustment that amounted to a net loss of $6.40M in the same period last year and an unfavorable fair-value adjustment that amounted to a net loss of $94,000 in the first quarter of fiscal 2018 (sequential quarter).

In the second quarter of fiscal 2018, $331.90M of loans were originated and purchased for sale, 39 percent lower than the $541.90M for the same period last year, and 15 percent lower than the $392.30M during the first quarter of fiscal 2018 (sequential quarter).  The loan origination volume has reduced from the previous year because increased mortgage interest rates have reduced refinance activity.  Total loans sold during the quarter ended December 31, 2017 were $361.40M, 43 percent lower than the $638.50M sold during the same quarter last year, and five percent lower than the $381.10M sold during the first quarter of fiscal 2018 (sequential quarter).  Total loan originations (counting loans originated and purchased for investment and loans originated and purchased for sale) were $366.80M in the second quarter of fiscal 2018, a decrease of 39 percent from $605.30M in the same quarter of fiscal 2017, and 16 percent lower than the $437.20M in the first quarter of fiscal 2018 (sequential quarter).

Non-interest expenses reduced $1.46M to $13.21M in the second quarter of fiscal 2018 from $14.67M in the same quarter last year.  The decrease was mainly because of a $1.72M decrease in salaries and employee benefits expense. The decrease in salaries and employee benefits expense was mainly related to lower variable compensation resulting from lower mortgage banking loan originations and staff reductions in mortgage banking. On a sequential quarter basis, non-interest expenses reduced $2.52M, or 16 percent, mainly as a result of a decrease in salaries and employee benefits expense and other non-interest expenses because of lower litigation settlement expense.

The Company’s income tax provision was $2.07M for the second quarter of fiscal 2018, up 89 percent from the $1.10M provision for income taxes in the same quarter last year. The increase was mainly attributable to the net deferred tax asset revaluation, partly offset by lower income before taxes and the reduction of the federal tax rate. The Company believes that the tax provision recorded in the second quarter of fiscal 2018 reflects its current income tax obligations.

PROV has a market value of $136.08M while its EPS was booked as $0.37 in the last 12 months. The stock has 7.42M shares outstanding. In the profitability analysis, the company has net profit margin of 2.60%. Beta value of the company was 0.03; beta is used to measure riskiness of the security. Analyst recommendation for this stock stands at 3.00.

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