Provident Financial plc

Ladies and gentlemen, thank you for standing by. Welcome to the first quarter earnings call. At this time, all participants are in listen-only mode. Later, we will have a question-and-answer session. Instructions for queuing up will be given at that time. Should you require operator assistance, press star zero on your phone's keypad. As a reminder, today's conference is being recorded for replay, and that replay will be available starting today at 11 a.m. Pacific, and through November 3rd at midnight. To access that replay, dial 866-207-1041. Enter access code 3655739. International participants can dial 402-978-0847. Again, the phone numbers for domestic are 866-207-1041. 1-0-4-9, International, 4-0-2-9-7-8-0-8-4-7. Access code for that replay is 3-6-5-5-7-3-9. Again, replay from today, 11 a.m. Pacific through November 3rd. At this time, I would now like to turn this conference over to your host, Chairman and CEO, Craig Blunden. Please go ahead, sir. Thank you, John. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings. And on the call with me is Donovan Turnis, 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's 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 actual results may differ materially from those discussed today. Information on the risk factors that could cause actual results to differ from any forward-looking statements is available from the earnings release that was distributed yesterday, from the Annual Report Form 10-K for the year ended June 30, 2021, 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 they are made, and the company assumes no obligation to update this information. To begin with, thank you for participating in our call. I hope that each of you has had an opportunity to review our earnings release, which describes our first quarter results. In the most recent quarter, we originated and purchased $60.9 million of loans held for an investment, a decrease from the $93.3 million in the prior sequential quarter. During the most recent quarter, we also experienced $53.9 million of loan principal payments and payoffs, which is down from the $79.9 million in the June 2021 quarter and still tempering the growth of loans held for investment. In the September 2021 quarter, competition remains elevated for lower risk loan products, but it seems that many mobile family and commercial real estate borrowers are once again completing 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 and purchases in the December 2021 quarter will be similar to the volume we experienced this quarter. With the three months ended September 30, 2021, loans held for investment increased by approximately 1% compared to the June 30, 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 that there are just $20,000 of early-stage delinquency balances at September 30th, 2021. Additionally, non-performing assets decreased to $6.6 million which is down from $8.6 million on June 30th, 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 the expiration of their initial forbearance. At the time, we extend the forbearance period Beyond six months, we downgrade the loans to non-performing status. As of September 30, 2021, there was one single-family loan in forbearance with an outstanding balance of approximately $308,000, or 0.04% of gross loans held for investment. On March 31, 2021, we ended new requests pursuant to our forbearance program. Existing forbearance loans will run their course as provided in their individual forbearance agreements and may be eligible for an extension. We recorded a $339,000 negative provision for loan losses in the September 2021 quarter. The allowance for loan losses to gross loans held for investment decreased to 86 basis points on September 30th from 88 basis points on June 30th. You will note that we remain on the incurred loss model and have not adopted CECL. This means that our allowance methodology cannot be reasonably compared to CECL adopters. Our net interest margin expanded by 17 basis points for the quarter ended September 30, 2021 compared to the June 2021 sequential quarter as a result of a 14 basis point increase in the average yield on total interest earning assets and a five-basis point decrease in the cost of total and sparing liabilities. The increase in the net interest margin was primarily resolved with the remixing of the balance sheet stemming from the increase in average loans receivable, the decrease in average investment securities, the increase in average deposits, and the decrease in average borrowings. Notably, our average cost of deposits decreased by two basis points to 13 basis points for the quarter ended September 30th, 2021, compared to the prior sequential quarter. Additionally, our borrowing costs decreased by approximately three basis points in the September 2021 quarter, compared to the June 2021 quarter, primarily due to a $21,000 prepayment fee in June that was not replicated in the September 2021 quarter, in addition to the scheduled maturities in the September quarter of higher cost borrowings. The 2.71% net interest margin this quarter was also positively impacted by approximately five basis points as a result of decrease in amortization, the net deferred loan costs associated with the loan payoff in the September quarter in comparison to the average net deferred loan cost amortization of the previous five quarters. Also, the net interest margin improved as a result of the $139,000 recovery of loan interest income on two partially charged-off loans that paid in full in the September 2021 quarter, impacting the net interest margin by approximately five basis points. We continue to look for operating efficiencies throughout the company to lower operating expenses. Notably, our FTE count on September 30, 2021, increased to 164 compared to 163 FTE on the same date last year, a very small increase. You will note that we recorded a $1.2 million credit for the employee retention tax credit in the September 2021 quarter, consistent with the Consolidated Appropriations Act of 2021 and the American Rescue Plan Act of 2021, where eligible employers can claim a maximum credit equal to 70% of $10,000 of qualified wages paid to an employee per calendar quarter. The general requirements to be eligible to claim the credit is a 20% or more decline in gross receipts in the calendar 2021 quarter compared to the same quarter in calendar year 2019 and 500 or fewer full-time employees based on the average of the 2019 calendar year. Additionally, we received a $125,000 litigation settlement in the September 2021 quarter, which was reported as a credit to other non-interest expense, which we consider a one-time item. Our short-term strategy for balance sheet management some change 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 excess liquidity and government-sponsored mortgage-backed securities with an estimated average lives of approximately four years. We exceed well capital ratios by a significant margin, allowing us to execute our business plan and capital management goals without complications. We believe that maintaining our cash dividend is very important. 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 repurchase approximately 50,000 shares of common stock in the September 2021 quarter under the April 2020 stock repurchase program. We encourage everyone to review our September 30th investor presentation posted on our website. You will find that we included slides regarding financial metrics, asset quality, and capital management, which we believe will give you additional insight on our solid financial foundation supporting the future growth of the company. We will now entertain any questions you may have regarding our financial results. Thank you. John? Ladies and gentlemen, if you would like to ask a question, please press zone zero on your phone's keypad. You will hear an acknowledgment that you've been placed in queue, and you can remove yourself from queue at any time by repeating the 1-0 command. Once again, for questions, press 1-0 at this time. And our first question comes from Nick Churcherail with Piper Sandler. Go ahead, please. Your line is open. Good day, Craig and Donovan.

How are you?

I'm well. Thank you. Thank you.