Provident Financial (US:PROV)2024-02-08 19:46PART I - FINANCIAL INFORMATION Financial Statements This section presents the unaudited interim condensed consolidated financial statements, including the adoption of the CECL standard and its impact on the allowance for credit losses Condensed Consolidated Statements of Financial Condition Total assets decreased by 2% to $1.30 billion, driven by lower cash and investment securities, while deposits fell by 4% and borrowings increased by 3% Condensed Consolidated Statements of Financial Condition (in thousands) | | Dec 31, 2023 | June 30, 2023 | | :--- | :--- | :--- | | Total Assets | $1,301,093 | $1,332,948 | | Cash and cash equivalents | $46,878 | $65,849 | | Investment securities | $143,688 | $156,492 | | Loans held for investment, net | $1,075,765 | $1,077,629 | | Total Liabilities | $1,171,432 | $1,203,261 | | Total deposits | $911,980 | $950,571 | | Borrowings | $242,500 | $235,009 | | Total Stockholders' Equity | $129,661 | $129,687 | Condensed Consolidated Statements of Operations Net income decreased for Q2 and six months of FY2024 due to net interest margin compression, partially offset by a recovery of credit losses Key Operating Results (in thousands, except per share data) | Metric | Qtr Ended Dec 31, 2023 | Qtr Ended Dec 31, 2022 | Six Months Ended Dec 31, 2023 | Six Months Ended Dec 31, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $8,774 | $9,385 | $17,913 | $18,350 | | (Recovery of) Provision for Credit Losses | ($720) | $191 | ($175) | $261 | | Net Income | $2,141 | $2,371 | $3,903 | $4,461 | | Diluted EPS | $0.31 | $0.33 | $0.56 | $0.61 | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity slightly decreased due to dividends, stock repurchases, and CECL adoption, largely offset by net income Changes in Stockholders' Equity (Six Months Ended Dec 31, 2023, in thousands) | Description | Amount | | :--- | :--- | | Balance at June 30, 2023 | $129,687 | | Net Income | $3,903 | | Adoption of CECL standard | ($824) | | Purchase of treasury stock | ($1,257) | | Cash dividends ($0.28/share) | ($1,957) | | Other, net | $59 | | Balance at Dec 31, 2023 | $129,661 | Condensed Consolidated Statements of Cash Flows Cash and cash equivalents decreased for the six months ended December 31, 2023, primarily due to financing outflows partially offset by operating and investing activities Cash Flow Summary (Six Months Ended Dec 31, in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $3,458 | $5,212 | | Net cash provided by (used for) investing activities | $11,885 | ($84,364) | | Net cash (used for) provided by financing activities | ($34,314) | $80,578 | | Net (decrease) increase in cash and cash equivalents | ($18,971) | $1,426 | Notes to Unaudited Interim Condensed Consolidated Financial Statements The notes detail accounting policies, including the CECL standard adoption, investment securities, loans, fair value measurements, and stock repurchase programs - The Corporation adopted the CECL standard (ASC 326) on July 1, 2023. The transition resulted in a $1.2 million increase in the Allowance for Credit Losses (ACL), which was recorded as an $824,000 decrease to retained earnings, net of tax32 - As of December 31, 2023, the company held investment securities with unrealized losses of $15.3 million, primarily due to changes in interest rates rather than credit quality. The company has the ability and intent to hold these securities to maturity4345 - On September 28, 2023, the Board approved a new stock repurchase plan for up to 350,353 shares. During the quarter ended December 31, 2023, the company repurchased 62,710 shares at an average price of $11.96 per share145147 - On January 25, 2024, the Board of Directors declared a quarterly cash dividend of $0.14 per share, payable on March 7, 2024149 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses financial condition and operating results, highlighting decreased net income due to net interest margin compression and the adoption of the CECL methodology Comparison of Financial Condition Total assets decreased by 2% to $1.30 billion, driven by lower cash and investment securities, while deposits fell by 4% and borrowings increased by 3% - Total assets decreased by $31.9 million (2%) to $1.30 billion, primarily from a $18.9 million decrease in cash and a $12.8 million decrease in investment securities168169170 - Total deposits decreased by $38.6 million (4%) to $912.0 million, as customers sought higher interest rates elsewhere. Core deposits fell by $72.0 million, while time deposits increased by $33.4 million177178 - Total borrowings increased by $7.5 million (3%) to $242.5 million to augment the decline in deposits179 Comparison of Operating Results Net income decreased for Q2 and six months of FY2024 due to net interest margin compression, partially offset by a recovery of credit losses Key Performance Metrics | Metric | Q2 FY2024 | Q2 FY2023 | Six Months FY2024 | Six Months FY2023 | | :--- | :--- | :--- | :--- | :--- | | Net Income (in millions) | $2.1 | $2.4 | $3.9 | $4.5 | | Diluted EPS | $0.31 | $0.33 | $0.56 | $0.61 | | Return on Average Assets | 0.66% | 0.75% | 0.60% | 0.72% | | Return on Average Equity | 6.56% | 7.27% | 5.98% | 6.85% | | Net Interest Margin | 2.78% | 3.05% | 2.83% | 3.05% | - Net interest income decreased 7% in Q2 FY2024 due to a 27 basis point decline in net interest margin to 2.78%, as the average cost of interest-bearing liabilities rose more significantly than the yield on interest-earning assets187 - A recovery of credit losses of $720,000 was recorded in Q2 FY2024, compared to a provision of $191,000 in Q2 FY2023. This was mainly due to a shorter estimated loan portfolio life from changing interest rate and prepayment estimates220 - Non-interest expense increased 8% in Q2 FY2024 to $7.3 million, primarily due to higher salaries and employee benefits231 Asset Quality Asset quality remained stable with a slight increase in non-performing loans to $1.8 million, representing 0.16% of loans held for investment Non-Performing Assets (in thousands) | Metric | Dec 31, 2023 | June 30, 2023 | | :--- | :--- | :--- | | Total non-performing loans | $1,750 | $1,300 | | Real estate owned, net | $0 | $0 | | Total non-performing assets | $1,750 | $1,300 | | Non-performing loans as a % of loans held for investment, net | 0.16% | 0.12% | | Non-performing assets as a % of total assets | 0.13% | 0.10% | - Total classified assets, comprised of special mention and substandard loans, increased to $2.6 million at Dec 31, 2023 from $2.4 million at June 30, 2023244 Liquidity and Capital Resources The Corporation maintains adequate liquidity through deposits and borrowing facilities, remaining 'well-capitalized' with a Tier 1 leverage ratio of 9.48% - Total available borrowing capacity was approximately $499.5 million at December 31, 2023, including $266.5 million from the FHLB and a $183.0 million discount window facility at the FRB251252 - The Corporation (on an unconsolidated basis) had liquid assets of $7.1 million at December 31, 2023, to cover operating expenses and dividends255 Bank Regulatory Capital Ratios (as of Dec 31, 2023) | Ratio | Actual | Minimum to Be Well Capitalized | | :--- | :--- | :--- | | Tier 1 leverage capital | 9.48% | 5.00% | | CET1 capital | 18.20% | 6.50% | | Tier 1 capital | 18.20% | 8.00% | | Total capital | 19.24% | 10.00% | Quantitative and Qualitative Disclosures about Market Risk The Corporation manages interest rate risk by analyzing Net Portfolio Value (NPV) and Net Interest Income (NII) sensitivity under various rate scenarios Net Portfolio Value (NPV) Sensitivity Analysis (as of Dec 31, 2023) | Rate Change (bp) | NPV Change (in thousands) | Sensitivity Measure (bp change) | | :--- | :--- | :--- | | +300 | ($275) | 7 | | +200 | $884 | 12 | | +100 | $1,468 | 13 | | Base Case | $119,961 | — | | -100 | ($5,410) | (41) | | -200 | ($18,577) | (137) | | -300 | ($15,025) | (115) | Net Interest Income (NII) Sensitivity Analysis (Next 12 Months) | Rate Change (bp) | Change in NII (Dec 31, 2023) | Change in NII (June 30, 2023) | | :--- | :--- | :--- | | +200 | -0.62% | -5.26% | | +100 | 0.57% | -1.95% | | -100 | -3.58% | 1.25% | | -200 | -7.51% | -0.59% | - The interest rate gap analysis as of December 31, 2023, shows a cumulative negative gap of $110.3 million for maturities under 12 months, indicating more liabilities than assets are scheduled to reprice in the short term276 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2023, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the Corporation's disclosure controls and procedures were effective as of December 31, 2023288 - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls289 PART II - OTHER INFORMATION Legal Proceedings The Corporation is involved in various claims and lawsuits but expects no material adverse effect on its financial condition or operations - The Corporation is not party to any pending legal proceedings that it believes would have a material adverse effect on its financial condition, operations or cash flows290 Risk Factors No material changes to the risk factors previously disclosed in the Corporation's Annual Report on Form 10-K for the fiscal year ended June 30, 2023 - No material changes in risk factors were reported since the last Annual Report on Form 10-K292 Unregistered Sales of Equity Securities and Use of Proceeds The Corporation repurchased 62,710 shares of common stock at an average price of $11.96 per share under its publicly announced plan Equity Securities Purchases (Q2 FY2024) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2023 | 21,132 | $12.87 | | Nov 2023 | 38,026 | $11.50 | | Dec 2023 | 3,552 | $11.47 | | Total | 62,710 | $11.96 | - On September 28, 2023, a new stock repurchase plan was approved, authorizing the purchase of 350,353 shares. As of December 31, 2023, 287,643 shares remain available for repurchase293 Other Information No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the quarter - No director or officer adopted or terminated a Rule 10b5-1 trading plan during the quarter298 Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO and XBRL data files