Provident Financial Holdings Reports Third Quarter of Fiscal 2019 Results

Net Interest Margin Expands 30 Basis Points to 3.53% in the March 2019 Quarter in Comparison to the March 2018 Quarter

Classified Assets Decrease 6% to $14.8 Million at March 31, 2019 in Comparison to $15.8 Million at June 30, 2018

Loans Held for Investment and Deposits Increase in March 2019 Quarter in Comparison to December 31, 2018 Balances

Mortgage Banking Exit Well Underway Resulting in Approximately $1.60 Million of One-Time Costs in the March 2019 Quarter

RIVERSIDE, Calif., April 29, 2019 (GLOBE NEWSWIRE) -- Provident Financial Holdings, Inc. (“Company”), NASDAQ GS: PROV, the holding company for Provident Savings Bank, F.S.B. (“Bank”), today announced third quarter earnings results for the fiscal year ending June 30, 2019.

For the quarter ended March 31, 2019, the Company reported a net loss of $151,000, or $(0.02) per diluted share (on 7.51 million average diluted shares outstanding), down 109 percent from the net income of $1.73 million, or $0.23 per diluted share (on 7.62 million average diluted shares outstanding), in the comparable period a year ago. Compared to the same quarter last year, the decrease in earnings was primarily attributable to a $1.88 million decrease in the gain on sale of loans and a $484,000 increase in salaries and employee benefits expense, partly offset by the $189,000 benefit from income taxes resulting from the loss before taxes this quarter in contrast to the $667,000 provision for income taxes in the same quarter last year (an $856,000 difference).

“Our community banking business continues to strengthen and our outlook for the business remains favorable.  Our net interest margin continues to expand, credit quality in our loan portfolios is strong, and we are well-positioned to support our growth initiatives,” said Craig G. Blunden, Chairman and Chief Executive Officer of the Company.  “Additionally, we are well underway with the exit from our mortgage banking business.  We stopped accepting salable single-family loan applications on April 5, 2019 and a large percentage of the staff working for the division have subsequently been released from employment. We still expect to complete our mortgage banking exit by June 30, 2019,” Mr. Blunden concluded.

Return (loss) on average assets for the third quarter of fiscal 2019 was (0.05) percent compared to 0.59 percent for the same period of fiscal 2018; and return (loss) on average stockholders’ equity for the third quarter of fiscal 2019 was (0.49) percent compared to 5.76 percent for the comparable period of fiscal 2018.

On a sequential quarter basis, the $151,000 net loss for the third quarter of fiscal 2019 reflects a $2.11 million, or 108 percent decrease from the net income of $1.96 million in the second quarter of fiscal 2019. The decrease in earnings for the third quarter of fiscal 2019 compared to the second quarter of fiscal 2019 was primarily attributable to a $2.08 million increase in salaries and employee benefit expenses, a $544,000 decrease in the gain on sale of loans, a $221,000 change from a $217,000 recovery from the allowance for loan losses to a $4,000 provision for loan losses and a $219,000 decrease in net interest income, partly offset by the $189,000 benefit from income taxes in the third quarter of fiscal 2019 in contrast to the $810,000 provision for income taxes in the second quarter of fiscal 2019 (a $999,000 difference). Diluted earnings (loss) per share for the third quarter of fiscal 2019 were $(0.02) per share, down 108 percent from the $0.26 earnings per share during the second quarter of fiscal 2019. Return (loss) on average assets was (0.05) percent for the third quarter of fiscal 2019 compared to 0.69 percent in the second quarter of fiscal 2019; and return (loss) on average stockholders’ equity for the third quarter of fiscal 2019 was (0.49) percent, compared to 6.42 percent for the second quarter of fiscal 2019.

For the nine months ended March 31, 2019 net income increased $2.90 million, or 397 percent, to $3.63 million from $731,000 in the comparable period ended March 31, 2018; and diluted earnings per share for the nine months ended March 31, 2019 increased 433 percent to $0.48 per share (on 7.56 million average diluted shares outstanding) from $0.09 per share (on 7.74 million average diluted shares outstanding) for the comparable nine month period last year. Compared to the same period last year, the increase in earnings was primarily attributable to (a) the one-time, non-cash, net tax charge of $1.87 million from the net deferred tax assets revaluation required by the Tax Cuts and Jobs Act consistent with the lower corporate federal income tax rate applied in the second quarter of fiscal 2018 (not replicated this fiscal year), (b) the $3.42 million litigation reserve recognized in the first nine months of fiscal 2018 (not replicated this fiscal year), (c) a $1.81 million increase in net interest income, (d) a $1.96 million decrease in salaries and employee benefits expense and (e) the application of the lower statutory blended income tax rate of 29.56% this period as compared to the blended tax rate of 35.86% the same period last year, partly offset by a $5.65 million decrease in the gain on sale of loans.

Net interest income increased $488,000, or five percent, to $9.61 million in the third quarter of fiscal 2019 from $9.12 million for the same quarter of fiscal 2018, attributable to an increase in the net interest margin, partly offset by a lower average interest-earning assets balance.  The net interest margin during the third quarter of fiscal 2019 increased 30 basis points to 3.53 percent from 3.23 percent in the same quarter last year, primarily due to an increase in the average yield of interest-earning assets resulting primarily from the rise in interest rates over the last year, partly offset by a negligible increase in the average cost of interest-bearing liabilities. The average yield on interest-earning assets increased by 31 basis points to 4.09 percent in the third quarter of fiscal 2019 from 3.78 percent in the same quarter last year; while the average cost of interest-bearing liabilities increased by one basis point to 0.63 percent in the third quarter of fiscal 2019 from 0.62 percent in the same quarter last year. The average balance of interest-earning assets decreased by $41.4 million, or four percent, to $1.09 billion in the third quarter of fiscal 2019 from $1.13 billion in the same quarter last year. The average balance of interest-bearing liabilities decreased by $45.7 million, or four percent, to $979.0 million in the third quarter of fiscal 2019 from $1.02 billion in the same quarter last year.

The average balance of loans receivable, including loans held for sale, decreased by $46.8 million, or five percent, to $915.0 million in the third quarter of fiscal 2019 from $961.8 million in the same quarter of fiscal 2018, primarily due to decreases in both the average balance of loans held for sale (attributable to the previously disclosed winding down of the mortgage banking business) and, to a lesser extent, loans held for investment. The average yield on loans receivable increased by 25 basis points to 4.38 percent in the third quarter of fiscal 2019 from an average yield of 4.13 percent in the same quarter of fiscal 2018 reflecting the rise in interest rates over the last year as the predominantly adjustable rate loan portfolio repriced and new loans were originated at higher market interest rates. Also, the increase in the average loan yield was attributable to increases in both the average yield of loans held for investment and loans held for sale. The average balance of loans held for sale in the third quarter of fiscal 2019 was $39.5 million with an average yield of 4.74 percent, down from $73.3 million with an average yield of 4.13 percent in the same quarter of fiscal 2018. The average balance of loans held for investment in the third quarter of fiscal 2019 was $875.5 million with an average yield of 4.36 percent, down from $888.6 million with an average yield of 4.13 percent in the same quarter of fiscal 2018. Loan principal payments received in the third quarter of fiscal 2019 were $36.5 million, compared to $43.2 million in the same quarter of fiscal 2018.

The average balance of investment securities increased by $2.5 million, or three percent, to $101.9 million in the third quarter of fiscal 2019 from $99.4 million in the same quarter of fiscal 2018. The increase was primarily attributable to mortgage-backed securities purchases, partly offset by principal payments received on mortgage-backed securities.  The average yield on investment securities increased 78 basis points to 2.32 percent in the third quarter of fiscal 2019 from 1.54 percent for the same quarter of fiscal 2018. The increase in the average yield was primarily 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 third quarter of fiscal 2019, the Federal Home Loan Bank – San Francisco (“FHLB”) distributed $144,000 of quarterly cash dividends to the Bank on its FHLB stock, similar to the amount received 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 $2.8 million, or five percent, to $64.4 million in the third quarter of fiscal 2019 from $61.6 million in the same quarter of fiscal 2018. The average yield earned on interest-earning deposits in the third quarter of fiscal 2019 was 2.40 percent, up 89 basis points from 1.51 percent in the same quarter of fiscal 2018 as a result of the impact of increases in the targeted federal funds rate.

Average deposits decreased $38.7 million, or four percent, to $873.3 million in the third quarter of fiscal 2019 from $912.0 million in the same quarter of fiscal 2018.  The average cost of deposits remained relatively stable, increasing by one basis point to 0.39 percent in the third quarter of fiscal 2019 from 0.38 percent in the same quarter last year. Transaction account balances or “core deposits” decreased slightly to $666.7 million at March 31, 2019 from $670.0 million at June 30, 2018, while time deposits decreased $27.4 million, or 12 percent, to $210.2 million at March 31, 2019 from $237.6 million at June 30, 2018, consistent with the Bank’s strategy to decrease the percentage of time deposits in its deposit base.

The average balance of borrowings, which consisted of FHLB advances, decreased $6.8 million, or six percent, to $105.8 million while the average cost of FHLB advances increased five basis points to 2.61 percent in the third quarter of fiscal 2019, compared to an average balance of $112.6 million with an average cost of 2.56 percent in the same quarter of fiscal 2018. The increase in the average cost of advances was primarily due to an early payoff of $10.0 million in advances with a 1.53% interest rate in the third quarter of fiscal 2019 resulting in a $31,000 one-time gain.

During the third quarter of fiscal 2019, the Company recorded a provision for loan losses of $4,000, as compared to a recovery from the allowance for loan losses of $505,000 recorded during the same period of fiscal 2018 and a recovery of $217,000 recorded in the second quarter of fiscal 2019 (sequential quarter).

Non-performing assets, with underlying collateral located in California, decreased $848,000, or 12 percent, to $6.1 million, or 0.55 percent of total assets, at March 31, 2019, compared to $7.0 million, or 0.59 percent of total assets, at June 30, 2018. Non-performing loans remained relatively unchanged at $6.1 million at both March 31, 2019 and June 30, 2018. The non-performing loans at March 31, 2019 are comprised of 20 single-family loans ($5.3 million), one construction loan ($745,000) and one commercial business loan ($44,000).  At March 31, 2019, there was no outstanding real estate owned as compared to $906,000 at June 30, 2018.

Net loan recoveries for the quarter ended March 31, 2019 were $15,000 or 0.01 percent (annualized) of average loans receivable, compared to net loan charge-offs of $39,000 or 0.02 percent (annualized) of average loans receivable for the quarter ended March 31, 2018 and net loan recoveries of $123,000 or 0.05 percent (annualized) of average loans receivable for the quarter ended December 31, 2018 (sequential quarter).

Classified assets at March 31, 2019 were $14.8 million, comprised of $7.2 million of loans in the special mention category, $7.6 million of loans in the substandard category and no real estate owned; while classified assets at June 30, 2018 were $15.8 million, comprised of $7.5 million of loans in the special mention category, $7.4 million of loans in the substandard category and $906,000 in real estate owned.

For the quarter ended March 31, 2019, no new loans were restructured from their original terms and classified as restructured loans, while one previously restructured loan was downgraded from the pass category to special mention. The outstanding balance of restructured loans at March 31, 2019 was $4.6 million (10 loans), down 12 percent from $5.2 million (11 loans) at June 30, 2018, but up 10 percent from $4.2 million (nine loans) at December 31, 2018 (sequential quarter). As of March 31, 2019, one loan was classified as special mention ($440,000), one loan was classified as substandard accrual ($1.4 million) and eight loans were classified as substandard non-accrual ($2.7 million). As of March 31, 2019, 63% or $2.9 million of the restructured loans have a current payment status.

The allowance for loan losses was $7.1 million at March 31, 2019, or 0.79 percent of gross loans held for investment, compared to $7.4 million at June 30, 2018, or 0.81 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, 2019.

Non-interest income decreased by $2.16 million, or 41 percent, to $3.05 million in the third quarter of fiscal 2019 from $5.21 million in the same period of fiscal 2018, primarily as a result of a decrease in the gain on sale of loans during the current quarter as compared to the comparable period last year.  On a sequential quarter basis, non-interest income decreased $543,000, or 15 percent, primarily as a result of the decline in the gain on sale of loans.

The gain on sale of loans decreased $1.88 million, or 52 percent, to $1.72 million for the quarter ended March 31, 2019 from $3.60 million in the comparable quarter last year (reflecting the impact of a lower loan sale volume resulting from the previously disclosed winding down of the mortgage banking operations, partly offset by a higher average loan sale margin) and decreased $544,000 or 24 percent from the quarter ended December 31, 2018 (sequential quarter). Total loan sale volume, which includes the net change in commitments to extend credit on loans to be held for sale, was $95.8 million in the quarter ended March 31, 2019, down $139.7 million or 59 percent, from $235.5 million in the comparable quarter last year and decreased $35.5 million or 27 percent from $131.3 million in the quarter ended December 31, 2018 (sequential quarter). The average loan sale margin from mortgage banking was 179 basis points for the quarter ended March 31, 2019, an increase of 26 basis points from 153 basis points in the same quarter last year, and seven basis points higher than the 172 basis points in the second quarter of fiscal 2019 (sequential quarter).  The increase in the average loan sale margin was the result of a higher percentage of retail loan production (which generally has higher loan sale margins) versus wholesale loan production and maintaining pricing discipline throughout the quarter. The gain on sale of loans includes unfavorable fair-value adjustments 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 $778,000 in the third quarter of fiscal 2019, compared to a net loss of $844,000 in the same period last year and a net loss of $674,000 in the second quarter of fiscal 2019 (sequential quarter).

In the third quarter of fiscal 2019, $110.7 million of loans were originated for sale, 50 percent lower than the $220.2 million for the same period last year, and 24 percent lower than the $146.4 million during the second quarter of fiscal 2019 (sequential quarter). The loan origination volume has decreased from the previous year as a result of market conditions and the winding down of the mortgage banking operations.  Total loans sold during the quarter ended March 31, 2019 were $136.7 million, 39 percent lower than the $225.9 million sold during the same quarter last year, and 18 percent lower than the $167.5 million sold during the second quarter of fiscal 2019 (sequential quarter).  Total loan originations (including loans originated and purchased for investment and loans originated for sale) were $154.7 million in the third quarter of fiscal 2019, a decrease of 43 percent from $269.5 million in the same quarter of fiscal 2018, and 17 percent lower than the $185.7 million in the second quarter of fiscal 2019 (sequential quarter).

Non-interest expenses increased $561,000, or five percent, to $13.00 million in the third quarter of fiscal 2019 from $12.44 million in the same quarter last year.  The increase was primarily due to a $484,000 increase in salaries and employee benefits expense. The increase in salaries and employee benefits expense was primarily attributable to $1.50 million of one-time costs associated with staff reductions in mortgage banking operations and $674,000 in current costs associated with incentive compensation accruals, partly offset by lower variable compensation resulting from lower mortgage banking loan originations. On a sequential quarter basis, non-interest expenses increased $2.13 million or 20 percent from $10.88 million, primarily as a result of a $2.08 million increase in salaries and employee benefits expense (attributable primarily to the one-time costs associated with staff reductions in mortgage banking operations, and the current costs associated with incentive compensation accruals).

On January 30, 2019 the Company announced the closure of its La Quinta Branch which will become effective at the close of business on May 10, 2019.  The one-time charges for the branch closure will be approximately $18,000 and the estimated operational cost savings will be approximately $473,000 per year.

On February 4, 2019, the Company announced that it was in the long-term best interests of the Company to exit the mortgage banking business. The Company continues to estimate that it will incur one-time costs of approximately $3.60 million to $4.00 million to complete the exit, which amounts include costs for severance, retention, personnel, premises, occupancy, depreciation, and costs related to termination of data processing and other contractual arrangements.  As of March 31, 2019, the total one-time costs incurred were approximately $1.60 million, comprised of $1.50 million in salaries and employee benefits expenses, $81,000 in premises and occupancy expenses and $13,000 in equipment expenses.

The Company’s efficiency ratio in the third quarter of fiscal 2019 was 103 percent, an increase from 87 percent in the same quarter last year and 81 percent in the second quarter of fiscal 2019 (sequential quarter).

The Company’s income tax benefit was $189,000 for the third quarter of fiscal 2019, in contrast to a $667,000 income tax provision in the same quarter last year (an $856,000 difference), which includes the application of the lower statutory income tax rate of 29.56% in fiscal 2019 versus a blended rate 35.86% in fiscal 2018. The Company believes that the tax provision recorded in the third quarter of fiscal 2019 reflects its current income tax obligations.

The Company repurchased 23,748 shares of its common stock during the quarter ended March 31, 2019 at an average cost of $19.36 per share. As of March 31, 2019, a total of 23,748 shares of the April 2018 stock repurchase plan have been purchased at an average cost of $19.36 per share, leaving 349,252 shares available for future purchases.

The Bank currently operates 14 retail/business banking offices in Riverside County and San Bernardino County (Inland Empire).  The La Quinta banking office will be closed effective at the close of business on May 10, 2019.  Additionally, the mortgage banking loan production offices were closed for new business subsequent to the close of business on April 5, 2019.

The Company will host a conference call for institutional investors and bank analysts on Tuesday, April 30, 2019 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 Tuesday, May 7, 2019 by dialing 1-800-475-6701 and referencing access code number 466444.

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 originate for sale and 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 2019 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.

PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Financial Condition
(Unaudited – In Thousands, Except Share Information)

PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(Unaudited - In Thousands, Except Earnings Per Share)

PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Operations – Sequential Quarters
(Unaudited – In Thousands, Except Share Information)

PROVIDENT FINANCIAL HOLDINGS, INC.
Financial Highlights
(Unaudited - Dollars in Thousands, Except Share Information)

PROVIDENT FINANCIAL HOLDINGS, INC.
Financial Highlights
(Unaudited - Dollars in Thousands, Except Share Information)

PROVIDENT FINANCIAL HOLDINGS, INC.
Financial Highlights
(Unaudited - Dollars in Thousands)

PROVIDENT FINANCIAL HOLDINGS, INC.
Financial Highlights
(Unaudited - Dollars in Thousands)



⁽¹⁾ The interest rate described in the rate column is the weighted-average interest rate or cost of all instruments, which are included in the balance of the respective line item.

⁽¹⁾ The interest rate described in the rate column is the weighted-average interest rate or yield/cost of all instruments, which are included in the balance of the respective line item.
⁽²⁾ Includes loans held for investment and loans held for sale at fair value, net of the allowance for loan losses.

⁽¹⁾ The interest rate described in the rate column is the weighted-average interest rate or yield/cost of all instruments, which are included in the balance of the respective line item.
⁽²⁾ Includes loans held for investment and loans held for sale at fair value, net of the allowance for loan losses.

PROVIDENT FINANCIAL HOLDINGS, INC.
Asset Quality ⁽¹⁾
(Unaudited – Dollars in Thousands)

⁽¹⁾ The non-performing loans balances are net of individually evaluated or collectively evaluated allowances, specifically attached to the individual loans and include fair value credit adjustments.