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Provident Financial (PROV) - 2021 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements Unaudited interim financial statements detail the company's financial condition, operating results, and cash flows for the period Condensed Consolidated Statements of Financial Condition Total assets decreased slightly to $1.17 billion, with a shift from cash and loans to investment securities Condensed Consolidated Statements of Financial Condition (In Thousands) | Account | December 31, 2020 | June 30, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $74,001 | $116,034 | | Investment securities | $207,256 | $123,344 | | Loans held for investment, net | $855,086 | $902,796 | | Total Assets | $1,170,727 | $1,176,837 | | Liabilities | | | | Total deposits | $909,968 | $892,969 | | Borrowings | $116,015 | $141,047 | | Total Liabilities | $1,045,743 | $1,052,861 | | Total Stockholders' Equity | $124,984 | $123,976 | Condensed Consolidated Statements of Operations Net income declined significantly for the quarter and six-month period, driven primarily by lower net interest income Key Operating Results (In Thousands, Except Per Share Data) | Metric | Quarter Ended Dec 31, 2020 | Quarter Ended Dec 31, 2019 | Six Months Ended Dec 31, 2020 | Six Months Ended Dec 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $7,638 | $9,639 | $15,804 | $19,221 | | Provision for loan losses | $39 | $(22) | $259 | $(203) | | Non-interest Income | $974 | $1,344 | $2,133 | $2,414 | | Non-interest Expense | $6,916 | $7,554 | $13,901 | $14,792 | | Net Income | $1,176 | $2,398 | $2,661 | $4,960 | | Diluted EPS | $0.16 | $0.31 | $0.36 | $0.65 | Condensed Consolidated Statements of Cash Flows A net decrease in cash of $42.0 million resulted from significant use of cash for investing and financing activities Cash Flow Summary for Six Months Ended December 31 (In Thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $6,733 | $2,077 | | Net cash used for investing activities | $(38,577) | $(44,524) | | Net cash (used for) provided by financing activities | $(10,189) | $20,048 | | Net decrease in cash and cash equivalents | $(42,033) | $(22,399) | Notes to Unaudited Interim Condensed Consolidated Financial Statements Detailed notes reveal a mortgage-heavy loan portfolio, an increased allowance for loan losses, and the impact of COVID-19 - The loan portfolio is primarily composed of mortgage loans, with multi-family loans at $488.4 million and single-family loans at $257.9 million as of December 31, 202050 - The allowance for loan losses increased to $8.54 million (0.99% of gross loans) at Dec 31, 2020, from $8.27 million (0.91% of gross loans) at June 30, 2020, reflecting increased qualitative adjustments due to the COVID-19 pandemic's economic impact5659240 - As of December 31, 2020, the Corporation had granted forbearance on 65 loans totaling $26.7 million related to COVID-19 hardship, with 8 loans totaling $2.6 million remaining in forbearance96 - Restructured loans increased significantly to $8.2 million as of December 31, 2020, from $2.6 million at June 30, 2020, primarily due to extended COVID-19 related forbearance modifications828397 Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes financial results, highlighting decreased profitability due to margin compression and the ongoing impact of COVID-19 Executive Summary and Operating Strategy The company outlines its community banking strategy focused on real estate lending and improving its deposit mix amid economic headwinds - The company's primary business is community banking, focusing on deposits and real estate lending (single-family, multi-family, commercial) in Southern California168169 - The operating strategy is to moderately increase total assets by growing various loan categories and to improve the deposit mix by increasing lower-cost checking/savings accounts and decreasing higher-cost time deposits170 - Management anticipates that the COVID-19 pandemic and the 150 basis point reduction in the federal funds rate in March 2020 will negatively impact net interest income and margin for calendar 2021 and possibly longer170 COVID-19 Impact to the Corporation The company is actively managing the pandemic's impact through customer relief programs, with a small number of loans remaining in forbearance Loan Forbearance Status as of December 31, 2020 (Dollars in Thousands) | Loan Type | Forbearance Granted (Count) | Forbearance Granted (Amount) | Forbearance Remaining (Count) | Forbearance Remaining (Amount) | | :--- | :--- | :--- | :--- | :--- | | Single-family loans | 58 | $23,239 | 6 | $1,835 | | Multi-family loans | 5 | $2,346 | 2 | $763 | | Commercial real estate loans | 2 | $1,066 | 0 | $0 | | Total | 65 | $26,651 | 8 | $2,598 | - Of the loans that completed their initial forbearance period, 16 single-family loans totaling $6.3 million were extended and subsequently reclassified as restructured loans182 - Potential future impacts from COVID-19 include higher provisions for loan losses, negative pressure on net interest margin from low interest rates, a decline in non-interest income, and increased non-interest expenses186 Comparison of Financial Condition at December 31, 2020 and June 30, 2020 The balance sheet remained stable as a decrease in cash and loans was offset by a significant increase in investment securities - Total assets decreased by $6.1 million (1%) to $1.17 billion189 - Cash and cash equivalents decreased by $42.0 million (36%) to $74.0 million, used to fund investment security purchases and pay down borrowings190 - Loans held for investment decreased by $47.7 million (5%) to $855.1 million, primarily due to a decline in single-family loans as repayments outpaced originations192 - Investment securities increased by $84.0 million (68%) to $207.3 million, following purchases of $106.4 million191 - Total deposits increased by $17.0 million (2%) to $910.0 million, as a $33.2 million increase in transaction accounts offset a $16.2 million decrease in time deposits196 - Total borrowings decreased by $25.0 million (18%) to $116.0 million due to repayments197 Comparison of Operating Results for the Quarter and Six Months ended December 31, 2020 and 2019 Quarterly and six-month net income declined significantly year-over-year, driven by lower net interest income and a weaker efficiency ratio Key Performance Metrics | Metric | Q2 FY2021 | Q2 FY2020 | 6M FY2021 | 6M FY2020 | | :--- | :--- | :--- | :--- | :--- | | Net Income (in millions) | $1.2 | $2.4 | $2.7 | $5.0 | | Diluted EPS | $0.16 | $0.31 | $0.36 | $0.65 | | Return on Average Assets | 0.40% | 0.87% | 0.45% | 0.91% | | Return on Average Equity | 3.77% | 7.81% | 4.27% | 8.13% | | Efficiency Ratio | 80% | 69% | 78% | 68% | Asset Quality Asset quality deteriorated as non-performing and restructured loans increased significantly from the previous period Non-Performing Assets (In Thousands) | Metric | Dec 31, 2020 | June 30, 2020 | | :--- | :--- | :--- | | Total non-performing loans | $10,270 | $4,924 | | Real estate owned, net | $0 | $0 | | Total non-performing assets | $10,270 | $4,924 | | NPLs as a % of loans held for investment, net | 1.20% | 0.55% | | NPAs as a % of total assets | 0.88% | 0.42% | - Total restructured loans increased by 215% to $8.2 million at Dec 31, 2020, from $2.6 million at June 30, 2020, with all restructured loans on non-accrual status260 Classified Assets (In Thousands) | Classification | Dec 31, 2020 | June 30, 2020 | | :--- | :--- | :--- | | Special mention loans | $4,667 | $8,600 | | Substandard loans | $10,270 | $5,469 | | Total classified assets | $14,937 | $14,069 | Liquidity and Capital Resources The Corporation maintains adequate liquidity and strong capital ratios that remain well above all regulatory requirements - Primary sources of funds are deposits and loan payments, and as of Dec 31, 2020, the Corporation had $74.0 million in cash and cash equivalents268272 - The Corporation has significant secondary liquidity sources, including a remaining FHLB borrowing facility of $277.9 million and a $176.2 million discount window facility at the Federal Reserve272 Bank Regulatory Capital Ratios as of December 31, 2020 | Ratio | Actual | Minimum to Be Well Capitalized | | :--- | :--- | :--- | | Tier 1 leverage capital | 9.78% | 5.00% | | CET1 capital | 18.30% | 6.50% | | Tier 1 capital | 18.30% | 8.00% | | Total capital | 19.56% | 10.00% | - The Bank paid a cash dividend of $5.0 million to the holding company in the first six months of fiscal 2021, while the holding company paid $2.1 million in dividends to its shareholders278 Quantitative and Qualitative Disclosures about Market Risk The Corporation is asset-sensitive and manages interest rate risk through its loan origination and investment strategies - The Corporation's strategy to mitigate interest rate risk involves originating adjustable-rate loans and holding frequently repricing mortgage-backed securities281 Net Portfolio Value (NPV) Sensitivity as of December 31, 2020 (in thousands) | Basis Points Change in Rates | NPV Change | NPV as % of Portfolio Value Assets | | :--- | :--- | :--- | | +300 bp | $111,580 | 19.77% | | +200 bp | $82,528 | 17.88% | | +100 bp | $48,233 | 15.57% | | 0 bp | $0 | 12.14% | | -100 bp | $(19,278) | 10.73% | Net Interest Income (NII) Sensitivity (Next 12 Months) | Basis Point Change in Rates | Change in NII (Dec 31, 2020) | Change in NII (June 30, 2020) | | :--- | :--- | :--- | | +300 bp | 9.42% | 15.11% | | +200 bp | 6.28% | 9.95% | | +100 bp | 3.40% | 5.25% | | -100 bp | (0.10)% | (0.05)% | - The Corporation is asset sensitive, meaning its net interest income is projected to increase in a rising interest rate environment and decrease slightly in a falling rate environment297 Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls - The CEO and CFO concluded that the Corporation's disclosure controls and procedures were effective as of December 31, 2020299 - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls300 PART II - OTHER INFORMATION Legal Proceedings No pending legal proceedings are expected to have a material adverse effect on the Corporation's financial condition - The Corporation is not a party to any pending legal proceedings that it believes would have a material adverse effect on its financial condition or operations301 Risk Factors There have been no material changes to the risk factors previously disclosed in the most recent Annual Report - No material changes in risk factors were reported since the last Annual Report on Form 10-K302 Unregistered Sales of Equity Securities and Use of Proceeds The Corporation did not repurchase shares under its public plan but did acquire shares from employees for tax purposes - The Corporation did not purchase any shares under its April 2020 stock repurchase plan during the quarter305 - As of December 31, 2020, 371,815 shares were available for purchase under the plan, which expires on April 30, 2021305 - The Corporation purchased 505 shares from employees at an average price of $13.68 per share to satisfy their withholding tax obligations on vested restricted stock304306