Provident Financial plc

Ladies and gentlemen, thank you for standing by. Welcome to the fourth quarter earnings call. At this time, all participants are in listen-only mode. Later, we will have a question and answer session, and instructions will be provided for you regarding queuing up for questions at that time. Should you require operator assistance during the call, press star zero on your phone's keypad. As a reminder, this conference is being recorded, and a replay will be available for you to listen to starting at 11 p.m. or 11 o'clock a.m. Pacific time today and running through August 5th at midnight. To access that replay, dial 866- 207-1041. Enter the access code of 106-0286. International callers would use the number of 402-970-0847. And again, that access code is 106-0286. Once again, those phone numbers for domestic, 866-207-1041. International, 402-970-0847. 0847, access code of 1060286. Replay available from 11 a.m. Pacific time today through August 5th. And at this time, I would now like to turn this conference over to our host, Chairman and CEO, Mr. Craig Blunden. Please go ahead, sir.

Thank you, John. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Providence Financial Holdings. And on the call with me is Donovan Chernus, our President, Chief Operating and Chief Financial Officer. Before we begin, I have a brief administrative item to address. Our presentation today discusses the company's business outlook and will include forward-looking statements. Those statements include descriptions of management plans, objectives or goals for future operations, products or services, forecasts of financial or other performance measures, and statements about the company's general outlook for economic and business conditions. We also may make forward-looking statements during the question and answer period following management's presentation. These forward-looking statements are subject to a number of risks and uncertainties, and ACTS results may differ materially from those discussed today. Information on the risk factors that could cause ACTS results to differ from any forward-looking statement is available from the earnings release that was distributed yesterday. from the annual report on Form 10-K for the year end of June 30, 2020, and from the Form 10-Qs and other SEC filings that are filed subsequent to the Form 10-K. Forward-looking statements are effective only as the date that they are made, and the company assumes no obligation to update this information. We begin by thanking you for participating in our call. I hope that each of you has had an opportunity to review our earnings release, which describes our fourth quarter results. In the most recent quarter, we originated and purchased $93.3 million of loans held for investment, an increase from the $61 million in the prior sequential quarter. During the most recent quarter, we also experienced $79.9 million of loan principal and payoffs, which is up $75.7 million in the March 2021 quarter and still tempering the growth of loans held for investment. In the June 21 quarter, competition remains elevated for lower credit risk loan products, but it seems that many multifamily and commercial real estate borrowers are once again considering transactions as a result of better general economic conditions. For the most part, our underwriting requirements have returned to pre-pandemic criteria, except for certain loan products, such as retail and office CRE, which remain a bit tighter. Additionally, our single-family and multifamily pipelines are similar in size to last quarter, suggesting our originations of purchases in the September 2021 quarter will be similar to the volume we experienced this quarter. the three months ended June 30, 2021, loans held for investment increased by approximately 1% compared to March 31, 2021, with increases in the single-family and multifamily loan categories, partly offset by declines in the commercial real estate and construction loan categories. Current credit quality is holding up well, and you will note there are no early-stage delinquency balances at June 30, 2021. Additionally, Non-performing assets decreased to $8.6 million, which is down from $9.8 million on March 31, 2021. Please note that the non-performing assets are largely comprised of forbearance loans downgraded to TDR non-accrual status as a result of not being able to resume their monthly payments at expiration of their initial forbearance. At the time we extended the forbearance period Beyond six months, we downgrade the loans to non-performing status. As of June 30, 2021, there were three single-family loans in forbearance with a combined outstanding balance of approximately $897,000, or 0.11% of gross loans held for investment, and one commercial real estate loan in forbearance with an outstanding balance of approximately $945,000, or 0.11% of gross loans held for investment. On March 31, 2021, we ended new requests pursuant to our forbearance program. Existing forbearance loans will run the courses provided in their individual forbearance agreements and may be eligible for an extension. We recorded a $767,000 negative provision for loan losses in the June 2021 quarter. The allowance for loan losses to gross loans held for investment decreased to 88 basis points on June 30 from 98 basis points on March 31. You will note that we remain on an incurred loss model and have not adopted CECL. This means that our allowance methodology cannot reasonably be compared to CECL adopters. Our net interest margin compressed by six basis points for the quarter end of June 30, 2021, compared to the March 2021 sequential quarter as a result of a seven basis point decrease in the average yield on total interest-bearing assets, partly offset by a one basis point decrease in the cost of total interest-bearing liabilities. The decline in the average yield on total interest-bearing assets was primarily the result of a sharp rise in liquidity stemming from the significant loan prepayments and increase in total deposits, which were reinvested at lower yields. Our average cost of deposits decreased by two basis points, 15 basis points for the quarter ended June 30, 2021, compared to the prior sequential quarter. Our borrowing costs increased by approximately 16 basis points in the June 2021 quarter compared to the March 2021 quarter, primarily due to a $21,000 prepayment fee on a $10 million borrowing prepaid in June that was scheduled to mature in August 2021. The 2.54% net interest margin this quarter was also negatively impacted by approximately six basis points. As a result, the increase in amortization, the net deferred loan costs associated with the loan payoff in the June quarter in comparison to the average net preferred loan cost amortization of five previous quarters. We continue to look for operating deficiencies throughout the company to lower operating expenses. Notably, our FPE count on June 30, 2021 decreased to 161 compared to 178 FTE on the same date last year, a 10% decline. You will note that we recorded a $2.4 million credit for the employee retention tax credit in the June 2021 quarter consistent with the Consolidated Appropriations Act of 2021 and the American Rescue Act of 2021. Eligible employers can claim a maximum credit equal to 70% of $10,000 of qualified wages paid to employee per calendar quarter. The general requirements to be eligible to claim the credit is a 20 percent or more decline in gross receipts in the calendar 2021 quarter compared to the same quarter in the calendar year 2019 and 500 or fewer full-time employees based on the average of the 2019 calendar year. There are a few irregular operating expenses incurred in the June 2021 quarter. The first was an increase in stock-based compensation expense as described in the earnings relief, resulting from investing and distribution of common stock awards. And the second was a $170,000 settlement of a pre-litigation employment matter. Our short-term strategy for balance sheet management is unchanged from last quarter. We believe that leveraging the balance sheet with prudent loan portfolio growth is the best course of action, but executing on that strategy in the current environment has proven difficult. In the interim, we are redeploying SLS liquidity and government-sponsored mortgage-backed securities with estimated average lives of approximately four years. We exceed the well-capitalized ratios by a significant margin, allowing us to execute on our business plan and capital management goals without complications. We believe that maintaining our cash dividend is very important, and doing so takes priority over stock buyback activity. However, we also recognize that prudent capital returns to shareholders through stock buyback programs is a valid capital management tool, and we repurchased approximately $50,000 shares of common stock in the June 2021 quarter under the April 2020 stock repurchase program. We encourage everyone to review our June 30th investor presentation posted on our website. You will find that we include slides regarding financial metrics, asset quality, and capital management, which we believe will give you additional insight on our strong financial foundation supporting the future growth of the company. In particular, slide 13 contains a forbearance table as of June 30, 2021, and footnote 5 of the commercial real estate table describing the composition of our commercial real estate secured loan portfolio and the balances that may be considered high risk in the current environment. We will now entertain any questions you may have regarding our financial results. Thank you.

John? Ladies and gentlemen, to ask a question, press 1-0 on your phone's keypad. You will hear an audio tone acknowledging that you've been placed in the queue. If you repeat the 1-0 command, that will remove you from the queue. And our first question, we will go to Nick Couturier. You're open. Please go ahead.