Provident Financial Holdings Reports Third Quarter of Fiscal 2016 Earnings

RIVERSIDE, Calif., April 26, 2016 (GLOBE NEWSWIRE) -- Provident Financial Holdings, Inc. (“Company”), (NASDAQ:PROV), the holding company for Provident Savings Bank, F.S.B. (“Bank”), today announced third quarter earnings for the fiscal year ending June 30, 2016.

For the quarter ended March 31, 2016, the Company reported net income of $1.49 million, or $0.18 per diluted share (on 8.52 million average diluted shares outstanding), down from net income of $2.60 million, or $0.29 per diluted share (on 9.11 million average diluted shares outstanding), in the comparable period a year ago.  The decrease in net income for the third quarter of fiscal 2016 was primarily attributable to decreases in net interest income and non-interest income, partly offset by a higher recovery from the allowance for loan losses and decreases in non-interest expenses and the provision for income taxes, compared to the same period one year ago.

“Mortgage banking fundamentals reversed course and improved this quarter which resulted in the sequential quarter increase in net income.  Expanding loan sale margins led to a profit this quarter as compared to a quarterly loss in the last quarter in our mortgage banking operations,” said Craig G. Blunden, Chairman and Chief Executive Officer of the Company.  “Loan growth remains elusive as we continue to be committed to prudent underwriting standards.  Additionally, loan prepayments have remained at an elevated level.  We are, however, continuing to grow our preferred loan portfolio while the held for investment single-family portfolio is declining resulting in what we believe to be a more favorable loan portfolio mix.  We also continue to increase core deposits and reduce certificates of deposits, improving our funding composition; and asset quality remains sound,” he concluded.

Return on average assets for the third quarter of fiscal 2016 decreased to 0.51 percent from 0.92 percent for the same period of fiscal 2015; and return on average stockholders’ equity for the third quarter of fiscal 2016 decreased to 4.36 percent from 7.22 percent for the comparable period of fiscal 2015.

On a sequential quarter basis, net income for the third quarter of fiscal 2016 reflects a $512,000, or 52 percent, increase from the net income of $982,000 in the second quarter of fiscal 2016.  The increase in net income in the third quarter of fiscal 2016 compared to the second quarter of fiscal 2016 was primarily attributable to an increase of $323,000 in net interest income, an increase of $332,000 in the recovery from the allowance for loan losses and an increase of $826,000 in non-interest income, partly offset by an increase of $626,000 in non-interest expense and an increase of $343,000 in the provision for income taxes.  Diluted earnings per share for the third quarter of fiscal 2016 were $0.18 per share, up 64 percent, from the $0.11 per share during the second quarter of fiscal 2016.  Return on average assets increased to 0.51 percent for the third quarter of fiscal 2016 from 0.34 percent in the second quarter of fiscal 2016; and return on average stockholders’ equity for the third quarter of fiscal 2016 was 4.36 percent, compared to 2.83 percent for the second quarter of fiscal 2016.

For the nine months ended March 31, 2016, net income decreased $2.40 million, or 33 percent, to $4.92 million from $7.32 million in the comparable period ended March 31, 2015; and diluted earnings per share for the nine months ended March 31, 2016 decreased $0.22 per share, or 28 percent, to $0.57 per share from $0.79 per share for the comparable nine month period last year. 

Net interest income decreased $466,000, or six percent, to $7.91 million in the third quarter of fiscal 2016 from $8.38 million for the same quarter of fiscal 2015, attributable to a decrease in the net interest margin, partly offset by a higher average earning assets balance. The net interest margin during the third quarter of fiscal 2016 decreased 25 basis points to 2.80 percent from 3.05 percent in the same quarter last year.  The decrease was primarily due to the decrease in the average yield of interest-earning assets and the increase in the average cost of interest-bearing liabilities.  The average yield of interest-earning assets decreased by 21 basis points to 3.41 percent in the third quarter of fiscal 2016 from 3.62 percent in the same quarter last year, while the average cost of liabilities increased by four basis points to 0.69 percent in the third quarter of fiscal 2016 from 0.65 percent in the same quarter last year.

The average balance of loans outstanding, including loans held for sale, decreased by $40.3 million, or four percent, to $952.0 million in the third quarter of fiscal 2016 from $992.3 million in the same quarter of fiscal 2015, primarily due to a decrease in average loans held for sale attributable to lower mortgage banking activity.  The average yield on loans receivable decreased by four basis points to 3.87 percent in the third quarter of fiscal 2016 from an average yield of 3.91 percent in the same quarter of fiscal 2015.  The decrease in the average loan yield was primarily attributable to payoffs of loans which had a higher yield than the average yield of loans held for investment, partly offset by a higher average yield on loans held for sale as compared to the same period last year.  The average balance of loans held for sale in the third quarter of fiscal 2016 was $146.2 million with an average yield of 3.75 percent as compared to $184.5 million with an average yield of 3.65 percent in the same quarter of fiscal 2015.  The outstanding balance of “preferred loans” (multi-family, commercial real estate, construction and commercial business loans) increased by $20.3 million, or four percent, to $473.7 million at March 31, 2016 from $453.4 million at June 30, 2015.  The percentage of preferred loans to total loans held for investment at March 31, 2016 increased to 58 percent from 55 percent at June 30, 2015.  Loan principal payments received in the third quarter of fiscal 2016 were $56.3 million, compared to $34.4 million in the same quarter of fiscal 2015.  

The average balance of investment securities increased by $8.9 million, or 56 percent, to $24.9 million in the third quarter of fiscal 2016 from $16.0 million in the same quarter of fiscal 2015.  The increase was attributable to the mortgage-backed security purchases during the first nine months of fiscal 2016, partly offset by principal payments received on mortgage-backed securities during the last 12 months.  The average yield on investment securities decreased 21 basis points to 1.54 percent in the third quarter of fiscal 2016 from 1.75 percent for the same quarter of fiscal 2015.  The decrease in the average yield was primarily attributable to the mortgage-backed security purchases during the first nine months of fiscal 2016 which had lower average yields than the existing portfolio.

In the third quarter of fiscal 2016, the Federal Home Loan Bank (“FHLB”) – San Francisco distributed a $163,000 cash dividend to the Bank, a $37,000 increase from the $126,000 cash dividend 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, increased $62.1 million, or 74 percent, to $145.6 million in the third quarter of fiscal 2016 from $83.5 million in the same quarter of fiscal 2015.  The increase in interest-earning deposits was primarily due to temporarily investing excess cash from ongoing business activities in short-term, highly liquid instruments as part of the Company’s interest rate risk management strategy.  The average yield earned on interest-earning deposits in the third quarter of fiscal 2016 was 0.50 percent, up from 0.25 percent from the same quarter of fiscal 2015 but significantly lower than the yield that could have been earned if the excess liquidity was deployed in loans or investment securities.

Average deposits increased $9.3 million, or one percent, to $920.3 million in the third quarter of fiscal 2016 from $911.0 million in the same quarter of fiscal 2015.  The average cost of deposits decreased by four basis points to 0.48 percent in the third quarter of fiscal 2016 from 0.52 percent in the same quarter last year, primarily due to higher cost time deposits repricing to lower current market interest rates and a lower percentage of time deposits to the total deposit balance.  Transaction account balances or “core deposits” increased $31.9 million, or six percent, to $610.3 million at March 31, 2016 from $578.4 million at June 30, 2015, while time deposits decreased $29.0 million, or eight percent, to $316.7 million at March 31, 2016 from $345.7 million at June 30, 2015, 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 $30.9 million, or 51 percent, to $91.3 million and the average cost of advances increased 22 basis points to 2.82 percent in the third quarter of fiscal 2016, compared to an average balance of $60.4 million and an average cost of 2.60 percent in the same quarter of fiscal 2015.  The increase in borrowings was primarily attributable to newly acquired higher cost long-term advances during the second half of fiscal 2015 to protect against rising interest rates.

During the third quarter of fiscal 2016, the Company recorded a recovery from the allowance for loan losses of $694,000 compared to the recovery of $111,000 recorded during the same period of fiscal 2015 and the $362,000 recovery recorded in the second quarter of fiscal 2016 (sequential quarter). 

Non-performing assets, with underlying collateral primarily located in California, decreased to $15.4 million, or 1.31 percent of total assets, at March 31, 2016, compared to $16.3 million, or 1.39 percent of total assets, at June 30, 2015.  Non-performing loans at March 31, 2016 decreased $1.6 million or 12 percent since June 30, 2015 to $12.3 million and were primarily comprised of 36 single-family loans ($9.9 million); four multi-family loans ($2.3 million); and one commercial business loan ($78,000).  Real estate owned acquired in the settlement of loans at March 31, 2016 increased $767,000, or 32 percent, to $3.2 million (five properties) from $2.4 million (three properties) at June 30, 2015.  The real estate owned at March 31, 2016 was comprised of five single-family real estate properties. 

Net recoveries for the quarter ended March 31, 2016 were $126,000 or 0.05 percent (annualized) of average loans receivable, compared to net recoveries of $130,000 or 0.05 percent (annualized) of average loans receivable for the quarter ended March 31, 2015 and net recoveries of $96,000 or 0.04 percent (annualized) of average loans receivable for the quarter ended December 31, 2015 (sequential quarter).

Classified assets at March 31, 2016 were $23.0 million, comprised of $6.7 million of loans in the special mention category, $13.1 million of loans in the substandard category and $3.2 million in real estate owned.  Classified assets at June 30, 2015 were $31.1 million, comprised of $8.2 million of loans in the special mention category, $20.5 million of loans in the substandard category and $2.4 million in real estate owned. 

For the quarter ended March 31, 2016, no loans were restructured from their original terms or newly classified as a restructured loan.  As of March 31, 2016, the outstanding balance of restructured loans that have not returned to their original promissory note terms or have subsequently been downgraded in risk classification was $5.7 million: two loans were classified as special mention ($1.1 million, on accrual status); and 12 loans were classified as substandard ($4.6 million, all are on non-accrual status).  As of March 31, 2016, $2.9 million, or 50 percent, of restructured loans were current with respect to their modified payment terms.

The allowance for loan losses was $8.2 million at March 31, 2016, or 1.01 percent of gross loans held for investment, compared to $8.7 million at June 30, 2015, or 1.06 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 March 31, 2016.

Non-interest income decreased by $2.85 million, or 25 percent, to $8.42 million in the third quarter of fiscal 2016 from $11.27 million in the same period of fiscal 2015, primarily as a result of a $2.61 million decrease in the gain on sale of loans.  On a sequential quarter basis, non-interest income increased $826,000, or 11 percent, primarily as a result of an increase in the gain on sale of loans, partly offset by the loss on the sale and operations of real estate owned acquired in the settlement of loans.

The gain on sale of loans decreased to $7.14 million for the quarter ended March 31, 2016 from $9.75 million in the comparable quarter last year, 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 $451.7 million in the quarter ended March 31, 2016, down $332.9 million, or 42 percent, from $784.6 million in the comparable quarter last year.  The average loan sale margin for mortgage banking was 157 basis points for the quarter ended March 31, 2016, up 32 basis points from 125 basis points in the same quarter last year and up 17 basis points from 140 basis points in the second quarter of fiscal 2016 (sequential quarter).  The gain on sale of loans includes a favorable 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 gain of $2.44 million in the third quarter of fiscal 2016, compared to a favorable fair-value adjustment that amounted to a net gain of $4.20 million in the same period last year.

In the third quarter of fiscal 2016, a total of $392.9 million of loans were originated and purchased for sale, 42 percent lower than the $680.6 million for the same period last year, and 17 percent lower than the $472.5 million during the second quarter of fiscal 2016 (sequential quarter).  The loan origination volume has decreased from the previous year because increased mortgage interest rates have reduced refinance activity.  Total loans sold during the quarter ended March 31, 2016 were $383.6 million, 37 percent lower than the $604.1 million sold during the same quarter last year and 16 percent lower than the $458.4 million sold during the second quarter of fiscal 2016 (sequential quarter).  Total loan originations (including loans originated and purchased for investment and loans originated and purchased for sale) were $439.5 million in the third quarter of fiscal 2016, a decrease of 40 percent from $735.8 million in the same quarter of fiscal 2015, and 16 percent lower than the $524.9 million in the second quarter of fiscal 2016 (sequential quarter).

The sale and operations of real estate owned acquired in the settlement of loans resulted in a net loss of $276,000 in the third quarter of fiscal 2016, compared to a net gain of $58,000 in the comparable period last year.  Three real estate owned properties were sold in the quarter ended March 31, 2016 compared to two real estate owned properties sold in the same quarter last year.  Two real estate owned properties were acquired in the settlement of loans during the third quarter of fiscal 2016, compared to one property acquired in the comparable period last year.  As of March 31, 2016, the real estate owned balance was $3.2 million (five properties), compared to $2.4 million (three properties) at June 30, 2015.

Non-interest expenses decreased by $683,000, or five percent, to $14.49 million in the third quarter of fiscal 2016 from $15.17 million in the same quarter last year.  The decrease was primarily a result of decreases in salaries and employee benefits, equipment, professional, sales and marketing, and other operating expenses.

The Company’s efficiency ratio deteriorated to 89 percent in the third quarter of fiscal 2016 from 77 percent in the third quarter of fiscal 2015.  The increase in the efficiency ratio was primarily the result of the decreases in net interest income and non-interest income, partly offset by a decrease in non-interest expense.

The Company’s provision for income taxes was $1.05 million for the third quarter of fiscal 2016, a decrease of $939,000 or 47 percent, from $1.99 million in the same quarter last year, as a result of the decrease in income before taxes.  The effective income tax rate for the quarter ended March 31, 2016 was 41.3 percent as compared to 43.4 percent in the same quarter last year.  The Company believes that the tax provision recorded in the third quarter of fiscal 2016 reflects its current income tax obligations.

The Company repurchased 205,750 shares of its common stock during the quarter ended March 31, 2016 at an average cost of $17.40 per share.  During the quarter, the Company purchased 42,100 shares attributable to its April 2015 stock repurchase plan thereby completing the plan.  As of March 31, 2016, a total of 163,650 shares or 39 percent of the shares authorized in the October 2015 stock repurchase plan have also been purchased, leaving 257,983 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 14 retail loan production offices located throughout California.  The Bank completed the closure of its Iris Plaza Branch in Moreno Valley, California on March 31, 2016 and transferred all customer relationships to its Moreno Valley Heacock Branch located approximately 4.8 miles from the former Iris Plaza Branch.

The Company will host a conference call for institutional investors and bank analysts on Wednesday, April 27, 2016 at 9:00 a.m. (Pacific) to discuss its financial results.  The conference call can be accessed by dialing 1-800-553-0358 and requesting the Provident Financial Holdings Earnings Release Conference Call.  An audio replay of the conference call will be available through Wednesday, May 4, 2016 by dialing 1-800-475-6701 and referencing access code number 391475.

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 2016 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.