Provident Financial plc

Ladies and gentlemen, thank you for standing by, and welcome to the Providence Financial Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during the call, please press star, then zero. And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Chairman and CEO, Craig Blunden. Please go ahead.

Thank you. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident 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's plans, objective 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 statement is available from the earnings release that was distributed yesterday. From the annual report on Form 10-K for the year ended June 30, 2021, and from the Form 10Qs and other SEC filings that are filed subsequent to the Form 10K. Forward-looking statements are effective only at 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 second quarter results. In the most recent quarter, we originated and purchased $65.3 million of loans held for investment, an increase from the $60.9 million in the prior sequential quarter. During the most recent quarter, we also experienced $72.5 million of loan principal payments and payoffs, which is up from the $53.9 million in the September 2021 quarter. and still tempering the growth rate of loans held for investment. Currently, competition remains elevated for loan originations, but it seems that many multifamily 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 year's and the March 2022 quarter will be similar to the volume we experienced this quarter. For the three months ended December 31, 2021, loans held for investment decreased by approximately 1% compared to September 30, 2021, with decreases in the multifamily and commercial real estate loaner categories partly offset by growth in the single-family and construction loan categories. Current credit quality is holding up very well, and you will note that there are just $3,000 of early-stage delinquency balances at December 31, 2021. Additionally, non-performing assets decreased substantially to just $2.8 million, which is down from the $6.6 million on September 30th, 2021. Please note that the decline in non-performing assets is primarily the result of forbearance loans previously downgraded to TDR non-accrual status that were subsequently upgraded to performing status given their satisfactory payment performance and compliance with the terms of their forbearance. As of December 31, 2021, there were no loans in forbearance. Previously, on March 31, 2021, we ended new requests pursuant to our forbearance program. As a result, forbearance loans ran the course as provided in their individual forbearance agreements and are now primarily classified as performing loans with a few remaining in TDR non-performing status. We recorded a $1.1 million negative provision for loan losses in the December 2021 quarter. The allowance for loan losses to gross loans held for investment decreased to 77 basis points on December 31st from 86 basis points on September 30th. You will note that we remain on the incurred loss model and have not adopted CECL. This means that our allowance methodology She cannot be reasonably compared with CECL adopters. Our net interest margin compressed by seven basis points for the quarter ended December 31, 2021 compared to the September 2021 sequential quarter as a result of an eight basis point decrease in the average yield on total interest-bearing assets and no change of the cost of total interest-bearing liabilities. The change in net interest margin was primarily the result of remixing of the balance sheet stemming from the slight increase in average loans receivable, the decrease in average investment securities, the increase in low-yield interest earning deposits, the increase in average deposits, and the decrease in average borrowings. Notably, our average cost of deposits decreased significantly by one basis point to 12 basis points for the quarter ended December 31, 2021, compared to the prior sequential quarter. Additionally, our borrowing costs increased by approximately 22 basis points in the December 2021 quarter compared to the September 2020 quarter, primarily due to a $39,000 prepayment fee in December that was not incurred in the September 2021 quarter. The 2.64% net interest margin this quarter was positively impacted by the approximately three basis points as a result of the $90,000 recovery of loan interest income on a partially charged off loan that paid in full in the December 2021 quarter and negatively impacted by approximately one basis point as a result of the $39,000 prepayment fee incurred on the prepayment of a FHLB advance described earlier. The net deferred loan costs associated with the loan payoffs in the December 2021 quarter in comparison to the average net deferred loan cost amortization of the previous five quarters did not have an impact as the current net deferred loan costs were very similar to the average of the look-back period. We continue to look for operating efficiencies throughout the company to lower operating expenses. Our FTE count on December 31, 2021, increased to 170 compared to 166 FTE on the same date last year, a very small increase. You will note that operating expenses have normalized levels because the employee retention tax credit that was repaid in the September and June 2021 quarters expired after September 30th, 2021, consistent with the passage of the Infrastructure Investment and Jobs Act signed by the President on November 15th. 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 as 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-capitalized ratios by significant margin in allowing us to execute on our business plan and capital management goals without complications. We believe that maintaining our cash given in is very important. Doing so takes priority over stock buyback activity. However, we also recognize that prudent capital returns shareholders through stock buyback programs is a valid capital management tool, and we repurchased approximately 103,000 shares of common stock in the December 2021 quarter under the April 2020 Stock Repurchase Program. We encourage everyone to review our December 31st investor presentation posted on our website. You will find that we've 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. You can obtain any questions you may have regarding our financial results. Thank you.

Ladies and gentlemen, if you wish to ask a question, please press one then zero on your telephone keypad. You may withdraw your question at any time by repeating the one zero command. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question today, please press one then zero at this time. Our first question will come from the line of Tim Coffey. with Janie. Please go ahead.