Provident Financial plc

Please continue to hold.

Ladies and gentlemen, thank you for standing by and welcome to the third quarter earnings call. At this time, all lines are in the listen-only mode. Later, we'll conduct a question and answer session and instructions will be given at that time. If you need assistance during the call, please press star followed by zero. And as a reminder, we are recording today. I would now like to send the conference over to 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 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 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 10-Qs and other SEC filings that are filed subsequent to the Form 10-K. Forward-looking statements are effective only as of 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 third quarter results. In the most recent quarter, we originated and purchased $94 million of loans held for investment, an increase from the $65.3 million in the prior sequential quarter. During the most recent quarter, we also experienced $53.6 million of loan principal payments and payoffs, which is down from the $72.5 million in the December 2021 quarter and at the lower end of the quarterly range. 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 quarter, suggesting our originations and purchases in the June 2022 quarter will fall in the range of recent prior quarters between $60 and $94 million. For the three months ended March 31, 2022, loans held for investment increased by approximately 5% compared to December 31st, 2021 with increases in the single-family, multifamily, commercial real estate, and construction loan categories. Current credit quality is holding up very well, and you will note that there are just $2,000 of early-stage delinquency balances at March 31, 2022. Additionally, non-performing assets decreased to just $2 million, which is down from the $2.8 million on December 31, 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 March 31, 2022, there are no loans in forbearance. Previously on March 31st, 2021, we ended new requests pursuant to our forbearance program. As a result, forbearance loans ran their courses provided in their individual forbearance agreements are now primarily classified as performing loans with a few remaining in TDR non-performing status. We recorded a $645,000 negative provision for loan losses in the March 2022 quarter. The allowance for loan losses to gross loans held for investment decreased to 66 basis points on March 31st from 77 basis points on December 31st. 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 compressed by three basis points for the quarter ended March 31, 2022 compared to the December 2021 sequential quarter as a result of a seven basis points decrease in the average yield on total interest-bearing assets, partly offset by a four basis points decrease in the cost of total interest-bearing liabilities. Notably, our average cost of deposits was unchanged to 12 basis points for the quarter ended March 31, 2022, compared to the prior sequential quarter. Additionally, our borrowing costs decreased by approximately 17 basis points in the March 22 quarter compared to the December 2021 quarter, primarily due to a $39,000 prepayment fee in the December quarter that was not replicated in the March 2022 quarter. The 2.61% net interest margin this quarter was positively impacted by approximately four basis points as a result of lower net deferred loan costs associated with fewer loan payoffs in the March 2022 quarter in comparison to the average net deferred loan cost amortization of the previous five quarters. We expect that near-term future quarters will also benefit from fewer loan payoffs as a result of higher mortgage interest rates. In addition, new loan production is being originated at a higher mortgage interest rates than recent prior quarters and adjustable loans in our portfolio are now adjusting to higher interest rates in comparison to their existing interest rates. Also, for mobile family and commercial real estate loans, we're beginning to see some cases where the loans are adjusting above their existing floor rate. These factors suggest that our net interest margin is poised for near-term expansion. We continue to look for operating efficiencies throughout the company to lower operating expenses. Our FTE count on March 31, 2022, increased to 163 compared to 162 FTE On the same date last year, a very small increase. You will note that operating expenses have been very stable at approximately $6.9 million per quarter after adjusting for the employee retention tax credit that was recognized in the September and June 2021 quarters. We do not expect a meaningful change to the stable run rate. 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. We were very successful in execution this quarter with loan origination and purchase volumes at a higher end of the quarterly range and loan payoffs at the lower end of the quarterly range. The total interest earning assets composition improved during the quarter with an increase in the average balance of loans receivable and decreases in the average balance of investment securities and interest earning deposits. The total interest bearing liabilities composition also improved with an increase in the average balance of deposits and a decrease in the average balance of borrowings. We exceed well-capitalized capital 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 a 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 69,000 shares of common stock in the March 2019 2022 quarter under the April 2020 stock repurchase program. We encourage everyone to review our March 31st investor presentation posted on our website. You will find 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.