Provident Financial Holdings Reports Second Quarter of Fiscal 2017 Earnings

RIVERSIDE, Calif., Jan. 27, 2017 (GLOBE NEWSWIRE) -- Provident Financial Holdings, Inc. (“Company”), (NASDAQ:PROV), the holding company for Provident Savings Bank, F.S.B. (“Bank”), today announced second quarter earnings for the fiscal year ending June 30, 2017.

For the quarter ended December 31, 2016, the Company reported net income of $1.50 million, or $0.18 per diluted share (on 8.15 million average diluted shares outstanding), up from net income of $982,000, or $0.11 per diluted share (on 8.60 million average diluted shares outstanding), in the comparable period a year ago. The increase in net income for the second quarter of fiscal 2017, as compared to the same period last year, was primarily attributable to increases in net interest income and the gain on sale of loans, partly offset by increases in salaries and employee benefits expense and other operating expenses.

“We are pleased with the current economic environment as it relates to our community banking business. Loan portfolio growth has accelerated from prior year levels, consistent with our investment and risk management objectives; credit quality remains strong; our net interest margin remains solid; and capital levels are robust. In short, community banking fundamentals are favorable,” said Craig G. Blunden, Chairman and Chief Executive Officer of the Company. “Mortgage banking fundamentals have deteriorated during the quarter as a result of the recent rise in mortgage interest rates.  In the near term we will be looking for opportunities to improve our mortgage banking business model in response to the anticipated weaker loan origination environment,” he concluded.

Return on average assets for the second quarter of fiscal 2017 increased to 0.50 percent from 0.34 percent for the same period of fiscal 2016; and return on average stockholders’ equity for the second quarter of fiscal 2017 increased to 4.53 percent from 2.83 percent for the comparable period of fiscal 2016.

On a sequential quarter basis, net income for the second quarter of fiscal 2017 reflects a $90,000, or 6 percent, decrease from the net income of $1.59 million in the first quarter of fiscal 2017. The decrease in net income in the second quarter of fiscal 2017 compared to the first quarter of fiscal 2017 was primarily attributable to a decrease in the gain on sale of loans, partly offset by a decrease in salaries and employee benefits expense and an increase in the recovery from the allowance for loan losses. Diluted earnings per share for the second quarter of fiscal 2017 were $0.18 per share, down 10 percent, from the $0.20 per share during the first quarter of fiscal 2017.  Return on average assets decreased to 0.50 percent for the second quarter of fiscal 2017 from 0.53 percent in the first quarter of fiscal 2017; and return on average stockholders’ equity for the second quarter of fiscal 2017 was 4.53 percent, compared to 4.79 percent for the first quarter of fiscal 2017.

For the six months ended December 31, 2016, net income decreased $327,000, or 10 percent, to $3.10 million from $3.43 million in the comparable period ended December 31, 2015; and diluted earnings per share for the six months ended December 31, 2016 decreased $0.01 per share, or three percent, to $0.38 per share from $0.39 per share for the comparable six month period last year.

Net interest income increased $1.50 million, or 20 percent, to $9.09 million in the second quarter of fiscal 2017 from $7.59 million for the same quarter of fiscal 2016, attributable to an increase in the net interest margin and a higher average earning assets balance. The net interest margin during the second quarter of fiscal 2017 increased 41 basis points to 3.09 percent from 2.68 percent in the same quarter last year, primarily due to the significant increase in the average yield of earning assets and a small decrease in the average cost of interest-bearing liabilities.  The average yield of interest-earning assets increased by 37 basis points to 3.68 percent in the second quarter of fiscal 2017 from 3.31 percent in the same quarter last year, while the average cost of liabilities decreased by five basis points to 0.64 percent in the second quarter of fiscal 2017 from 0.69 percent in the same quarter last year. The increase in the average yield of interest-earning assets was primarily due to the utilization of interest-earning deposits earning a nominal yield to fund higher balances of loans receivable and investment securities, which earned a significantly higher yield, and a special FHLB – San Francisco cash dividend.  The average earning assets balance for the second quarter of fiscal 2017 was $1.18 billion, up four percent from $1.13 billion during the same period last year.

The average balance of loans outstanding, including loans held for sale, increased by $127.7 million, or 14 percent, to $1.05 billion in the second quarter of fiscal 2017 from $922.7 million in the same quarter of fiscal 2016, primarily due to an increase in average loans held for sale attributable to elevated mortgage banking activity. The average yield on loans receivable decreased by four basis points to 3.85 percent in the second quarter of fiscal 2017 from an average yield of 3.89 percent in the same quarter of fiscal 2016. The decrease in the average loan yield was primarily attributable to a decrease in the average yield of loans held for sale.  The average balance of loans held for sale in the second quarter of fiscal 2017 was $197.1 million with an average yield of 3.59 percent as compared to $120.4 million with an average yield of 3.81 percent in the same quarter of fiscal 2016. The outstanding balance of “preferred loans” (multi-family, commercial real estate, construction and commercial business loans) increased by $34.8 million, or seven percent, to $554.0 million at December 31, 2016 from $519.2 million at June 30, 2016, net of undisbursed loan funds of $10.0 million and $11.3 million, respectively. The percentage of preferred loans to total loans held for investment at December 31, 2016 increased to 64 percent from 61 percent at June 30, 2016. Loan principal payments received in the second quarter of fiscal 2017 were $54.7 million, compared to $37.7 million in the same quarter of fiscal 2016. 

The average balance of investment securities increased by $30.0 million, or 192 percent, to $45.6 million in the second quarter of fiscal 2017 from $15.6 million in the same quarter of fiscal 2016. The increase was attributable to the mortgage-backed securities purchased during the second half of fiscal 2016, partly offset by principal payments received on mortgage-backed securities during the same period.  The average yield on investment securities decreased 70 basis points to 1.12 percent in the second quarter of fiscal 2017 from 1.82 percent for the same quarter of fiscal 2016.  The decrease in the average yield was primarily attributable to the mortgage-backed securities purchases during fiscal 2016 which had lower average yields than the existing portfolio and an accelerated premium amortization resulting from higher prepayments.

In the second quarter of fiscal 2017, the Federal Home Loan Bank (“FHLB”) – San Francisco distributed $458,000 of regular and special cash dividends to the Bank, a $279,000 or 156 percent increase from the cash dividends received by the Bank in the same quarter last year.

The average balance of the Company’s interest-earning deposits, primarily cash with the Federal Reserve Bank of San Francisco, decreased $114.1 million, or 62 percent, to $71.0 million in the second quarter of fiscal 2017 from $185.1 million in the same quarter of fiscal 2016. The decrease in interest-earning deposits was primarily due to redeployment of excess cash to fund loans held for investment, loans held for sale and purchases of investment securities.  The average yield earned on interest-earning deposits in the second quarter of fiscal 2017 was 0.56 percent, up from 0.28 percent in the same quarter of fiscal 2016 as a result of the impact of the increases in the federal funds rate in December 2016 and 2015.

Average deposits increased $17.9 million, or two percent, to $939.3 million in the second quarter of fiscal 2017 from $921.4 million in the same quarter of fiscal 2016. The average cost of deposits decreased by seven basis points to 0.41 percent in the second quarter of fiscal 2017 from 0.48 percent in the same quarter last year, primarily due to decreases in the average cost of transaction accounts and time deposits and a lower percentage of time deposits to the total deposit balance.  Transaction account balances or “core deposits” increased $21.7 million, or four percent, to $639.2 million at December 31, 2016 from $617.5 million at June 30, 2016, while time deposits decreased $19.4 million, or six percent, to $289.5 million at December 31, 2016 from $308.9 million at June 30, 2016, 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, increased $28.2 million, or 31 percent, to $119.5 million while the average cost of advances decreased 37 basis points to 2.44 percent in the second quarter of fiscal 2017, compared to an average balance of $91.3 million with an average cost of 2.81 percent in the same quarter of fiscal 2016. The decrease in the average cost of advances was primarily due to the increased utilization of overnight borrowings and short-term advances with a lower interest rate rather than long-term advances. The increase in the average balance of borrowings was utilized to fund loans held for sale and for investment and purchases of investment securities.

During the second quarter of fiscal 2017, the Company recorded a recovery from the allowance for loan losses of $350,000 compared to the recovery of $362,000 recorded during the same period of fiscal 2016 and the $150,000 recovery recorded in the first quarter of fiscal 2017 (sequential quarter).  These recoveries were primarily attributable to continued improvement in loan credit quality and net recoveries of previously charged-off loans.

Non-performing assets, with underlying collateral primarily located in California, remained relatively unchanged at $13.0 million, or 1.09 percent of total assets, at December 31, 2016, compared to $13.0 million, or 1.11 percent of total assets, at June 30, 2016.  Non-performing loans at December 31, 2016 decreased $244,000 or two percent since June 30, 2016 to $10.1 million and were primarily comprised of 33 single-family loans ($9.4 million); two multi-family loans ($568,000); one commercial business loan ($70,000) and one consumer loan (fully reserved).  Real estate owned acquired in the settlement of loans at December 31, 2016 increased $243,000, or nine percent, to $2.9 million (four single-family properties) from $2.7 million (four single-family properties) at June 30, 2016.

Net recoveries for the quarter ended December 31, 2016 were $16,000 or 0.01 percent (annualized) of average loans receivable, compared to net recoveries of $96,000 or 0.04 percent (annualized) of average loans receivable for the quarter ended December 31, 2015 and net recoveries of $205,000 or 0.08 percent (annualized) of average loans receivable for the quarter ended September 30, 2016 (sequential quarter).

Classified assets at December 31, 2016 were $21.2 million, comprised of $8.2 million of loans in the special mention category, $10.1 million of loans in the substandard category and $2.9 million in real estate owned.  Classified assets at June 30, 2016 were $21.9 million, comprised of $8.9 million of loans in the special mention category, $10.3 million of loans in the substandard category and $2.7 million in real estate owned.  For the quarter ended December 31, 2016, no loans were restructured from their original terms or newly classified as a restructured loan.  One restructured loan of $85,000 was extended for two additional years.

The allowance for loan losses was $8.4 million at December 31, 2016, or 0.96 percent of gross loans held for investment, compared to $8.7 million at June 30, 2016, or 1.02 percent of gross loans held for investment. Management believes that, based on currently available information, the allowance for loan losses is sufficient to absorb potential losses inherent in loans held for investment at December 31, 2016.

Non-interest income increased by $234,000, or three percent, to $7.83 million in the second quarter of fiscal 2017 from $7.60 million in the same period of fiscal 2016, primarily as a result of an increase in the gain on sale of loans, partly offset by the net loss on the sale and operations of real estate owned and a decrease in other non-interest income during the current quarter as compared to the comparable period last year. On a sequential quarter basis, non-interest income decreased $1.42 million, or 15 percent, primarily as a result of a decrease in the gain on sale of loans.

The gain on sale of loans increased to $6.48 million for the quarter ended December 31, 2016 from $6.04 million in the comparable quarter last year, reflecting the impact of a higher loan sale volume, partly offset by a slightly lower 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 $463.2 million in the quarter ended December 31, 2016, up seven percent, from $432.4 million in the comparable quarter last year. The average loan sale margin from mortgage banking was 139 basis points for the quarter ended December 31, 2016, down one basis point from 140 basis points in the same quarter last year and up 14 basis points from 125 basis points in the first quarter of fiscal 2017 (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 $6.40 million in the second quarter of fiscal 2017, compared to an unfavorable fair-value adjustment that amounted to a net loss of $1.81 million in the same period last year.

In the second quarter of fiscal 2017, a total of $541.9 million of loans were originated and purchased for sale, 15 percent higher than the $472.5 million for the same period last year, but 16 percent lower than the $647.3 million during the first quarter of fiscal 2017 (sequential quarter). Total loans sold during the quarter ended December 31, 2016 were $638.5 million, 39 percent higher than the $458.4 million sold during the same quarter last year, and 12 percent higher than the $568.3 million sold during the first quarter of fiscal 2017 (sequential quarter). Total loan originations (including loans originated and purchased for investment and loans originated and purchased for sale) were $605.3 million in the second quarter of fiscal 2017, an increase of 15 percent from $524.9 million in the same quarter of fiscal 2016, but 14 percent lower than the $705.6 million in the first quarter of fiscal 2017 (sequential quarter).

The sale and operations of real estate owned acquired in the settlement of loans resulted in a net loss of $63,000 in the second quarter of fiscal 2017, compared to a $35,000 net gain in the comparable period last year. Two real estate owned properties were sold in the quarter ended December 31, 2016 compared to one real estate owned property sold in the same quarter last year. No real estate owned properties were acquired in the settlement of loans during the second quarter of fiscal 2017, compared to four properties acquired in the comparable period last year.  As of December 31, 2016, the real estate owned balance was $2.9 million (four properties), compared to $2.7 million (four properties) at June 30, 2016.

Non-interest expenses increased $809,000 to $14.67 million in the second quarter of fiscal 2017 from $13.86 million in the same quarter last year.  The increase was primarily a result of increases in salaries and employee benefits expense, professional expenses and other non-interest expenses.  The increase in salaries and employee benefits expense was primarily related to higher mortgage banking loan originations.

The Company’s efficiency ratio improved to 87 percent in the second quarter of fiscal 2017 from 91 percent in the same quarter last year, due to the increases in net interest income and non-interest income, partly offset by the increase in non-interest expenses.

The Company’s provision for income taxes was $1.10 million for the second quarter of fiscal 2017, an increase of $387,000 or 55 percent, from $708,000 in the same quarter last year, as a result of the increase in income before taxes.  The effective income tax rate for the quarter ended December 31, 2016 was 42.1 percent as compared to 41.9 percent in the same quarter last year. The Company believes that the tax provision recorded in the second quarter of fiscal 2017 reflects its current income tax obligations.

The Company repurchased 85,800 shares of its common stock during the quarter ended December 31, 2016 at an average cost of $19.34 per share. As of December 31, 2016, a total of 117,686 shares or 30 percent of the shares authorized in the May 2016 stock repurchase plan have been purchased, leaving 279,314 shares available for future purchases.

The Bank currently operates 14 retail/business banking offices in Riverside County and San Bernardino County (Inland Empire). Provident Bank Mortgage operates two wholesale loan production offices and 13 retail loan production offices located throughout California.

The Company will host a conference call for institutional investors and bank analysts on Monday, January 30, 2017 at 9:00 a.m. (Pacific) to discuss its financial results. The conference call can be accessed by dialing 1-800-230-1074 and requesting the Provident Financial Holdings Earnings Release Conference Call.  An audio replay of the conference call will be available through Monday, February 6, 2017 by dialing 1-800-475-6701 and referencing access code number 416267.

For more financial information about the Company please visit the website at www.myprovident.com and click on the “Investor Relations” section.

Safe-Harbor Statement

This press release contains statements that the Company believes are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to the Company’s financial condition, liquidity, results of operations, plans, objectives, future performance or business. You should not place undue reliance on these statements, as they are subject to risks and uncertainties. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements the Company may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors which could cause actual results to differ materially from the results anticipated or implied by our forward-looking statements include, but are not limited to increased competitive pressures; changes in the interest rate environment; secondary market conditions for loans and our ability to sell loans in the secondary market; changes in general economic conditions and conditions within the securities markets; legislative and regulatory changes; and other factors described in the Company’s latest Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other filings with the Securities and Exchange Commission (“SEC”) - which are available on our website at www.myprovident.com and on the SEC’s website at www.sec.gov. We do not undertake and specifically disclaim any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements whether as a result of new information, future events or otherwise. These risks could cause our actual results for fiscal 2017 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of us and could negatively affect our operating and stock price performance.