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.

Great. Thanks. Good morning, gentlemen. Good morning. Good morning. Craig Donovan, the payoffs that you experienced in the quarter, was that any relation, do you think, to people trying to get in front of the rate hikes?

I think it's difficult to say. Certainly there has been much written about possible rate hikes and some of that written was in that December quarter time period, we did see kind of a shift in what we were experiencing in payoffs. We had more multifamily payoffs in the December quarter than we did single-family payoffs. And in recent prior quarters, the reverse was true, where there were more single-family payoffs than multifamily payoffs. So the mix is changing a bit with respect to what those payoffs look like.

Okay. And then returning your underwriting standards to pre-pandemic levels, has that been going on for a couple quarters now?

Yes, we've – slowly improved or loosened our underwriting standards, you know, really beginning about a year ago, maybe even a little bit longer than that, but really probably about a year ago. And each quarter we've gotten closer and closer to pre-pandemic standards. Right now we're just a little bit more cautious on commercial real estate, primarily in the retail and office sectors. Okay.

And can you kind of describe what you're seeing in the market for loans right now relative to, say, the prior quarter?

So the pipelines look pretty good, and I've been reading many conference call texts regarding or narratives regarding what others are seeing, and it seems like activity has picked up. probably particularly in the multifamily commercial real estate sector, maybe a little bit less so in single family. It seems like the refinance market is going to slow down a bit. And as a result of that, it's very competitive, and it's been competitive for a while as everybody has been scrambling for assets. We have seen a little bit more activity with respect to purchased loans, We did not execute any purchases in the December quarter, so the origination volume you saw in the December quarter were our originations. But we've seen more activity recently, and we bid on a couple of packages recently as well. So that seems to be picking up a bit. So from our perspective, loan contracts, Right around the quarter, we had a couple of quarters where there was net loan growth, and then December we shook up a little bit. But we think with better loan growth, if we can get prepayments to fall, and it seems a rise in mortgage rates would set us up well for prepayments to fall.

All right. Okay, and then just one final one for me on expenses. To the extent that you are experiencing wage pressures, what is kind of going to be your approach this next calendar year to stem that?

You know, Tim, when we think about wage pressure, we've been increasing wages all along. for the last couple of years, it seems. And we do market surveys with respect to where we think wages should be, and we implement on occasion wage increases across categories. We think there is wage pressure out there. We've read much about it as well. we can see that it seems to be more difficult to bring in new applications for potential employment. So it's out there. Our response is going to be what we're required to do. We obviously have to staff ourselves, and we've been able to do so, although there is some pressure out there.

Okay, great. Those are my questions. Thank you very much.

Thank you. Our next question comes from the line of Nick Couturel with Piper Sandler. Please go ahead.

Good day, everyone. How are you? Good, thanks. Good. Just following up on the deployment of cash into securities, what was the amount of purchases you've made so far in the March quarter?

Well, in the December quarter, we did $15 million of purchases, and essentially that kept our cash balances about flat from where they were when we started that December quarter. We have runoff, if you will, or prepayment or cash flows coming off at about $5 million a month or about $15 million a quarter. We would prefer... to use that cash flow and populate into our loan portfolio to the extent we can grow it. Secondarily, we would prefer to use that cash to repay or prepay advances as they mature. And then lastly, we're interested in obviously making certain our cash doesn't get up above kind of where it currently is we would then go out and look at investment security purchases. One interesting note, if we think about what the FOMC said yesterday with respect to where they're leaning, it appears that March would be liftoff with respect to an increase in interest rates. I think we're already seeing it on the short end of the curve. But what that would also mean is that Federal Reserve balances which are currently earning 15 basis points, would probably move up to earning 40 basis points or so if it's a 25 basis point increase. So those institutions with higher cash balances on balance sheet will get some lift with respect to the net interest margins and net interest income once the Fed begins to raise, irrespective of how they redeploy the cash or the cash flows coming in on their balance sheet.

That's helpful. And then just following up on the loan side, I appreciate the prepared remarks, but can you provide some commentary on the multifamily side? You know, it sounds like activity is picking up, but originations and purchases in this segment were down a bit relative to the previous quarter. Just some thoughts there would be helpful.

Yes. We see our pipelines are very close to where they were in the end of the September quarter and the end of the June quarter. In fact, you can kind of see that in our origination volumes. It's really competitive with respect to multifamily production. In fact, I mentioned earlier that we had been looking at a couple of packages of multifamily loans. In fact, we see Some of those packages, yesterday we were alerted that we missed out on a particular bid we had on a package. We were a little bit light with respect to our premium. Nonetheless, that's better activity than we've seen, particularly in the December quarter there. So I think origination volume, to the extent that we can land some purchase packages in will probably go up, and I think that's potentially in the multifamily sector as well as the single-family sector. Nonetheless, it is highly competitive out there. Yields are going up a bit with respect to multifamily and commercial kind of responding to market conditions, but not as much as you would think given the nature of the competitive landscape.

Okay, and then lastly, just with respect to credit costs, you posted another negative provision this quarter. Asset quality is pristine, and certainly future provisioning depends on growth and the overall environment. But do you think there's still room to drive coverage ratios lower, or is that starting to bottom?

Well, one of the things that we look at is where we were pre-pandemic, and really that was the December 31, 2019 quarter. I think we ended the 2019 quarter with about $6.9 million of allowance, and that was about 73 basis points on the loan portfolio. December 31st of 2021, we ended with 77 basis points of allowance on our portfolio. And in fact, we still have... slight factor or slight adjustment in our modeling with respect to pandemic meaning that we have some allowance allocated toward the pandemic environment which should move off as we kind of get through 2022 and as we see the economic environment improve and maybe some of the issues that we're seeing with pandemic go away. So I think there's room there with respect to moving down just from the standpoint that we kind of have a pandemic component built in to our current allowance that we didn't have two years ago. But secondarily, and maybe more important, if you look at our credit quality today in comparison to where we were two years ago, it's better. Non-performing assets are lower than they were two years ago, and classified assets are lower today and better than they were two years ago. So if we think about moving through this pandemic cycle, we still have a little bit of reserve or qualitative component built in with respect to the pandemic, and we actually had better characteristics with respect to credit quality from the standpoint of non-performing and classifieds. So I think there's some room. I don't know that it moves as dramatically as it did in the December quarter.

Thank you for taking my questions.

Thank you. If there are any additional questions, please press 1 and 0 at this time. And there are no remaining questions in the queue. Please continue.

All right. Well, if there's no other questions, I want to thank everyone for joining us on our conference call and look forward to speaking with all of you again next quarter.

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