Provident Financial plc

Ladies and gentlemen, thank you for standing by. Welcome to the Provident Financial Holdings Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for questions and answers with instructions given at that time. If you should require assistance during the conference call, please press star, then zero, and an AT&T specialist will assist you offline. As a reminder, your call today is being recorded. I'll now turn the conference call over to your host chairman and CEO, Craig Blunden. Please go ahead. Thank you.

Good morning, everyone. This is Craig Blunden, chairman, CEO of Providence Financial Holdings. And on the call with me is Donovan Ternes, 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 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 fourth quarter results. In the most recent quarter, we originated and purchased $85.9 million of loans held for investment, a decrease from the $94 million in the prior sequential quarter. During the most recent quarter, we also experienced $41.3 million of loan principal payments and payoffs which is down from the $53.6 million in the March 2022 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. Additionally, we're seeing more demand for single-family adjustable rate mortgage products as a result of higher fixed rate mortgage interest rates. 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 a bit smaller in comparison to last quarter, suggesting our originations and purchases in the September 22 quarter will fall to the mid to lower end of the range of recent prior quarters. which has been between $60 and $95 million. For the three months ended June 30, 2022, loans held for investment increased by approximately 5%, as compared to March 31, 2022, starting balances with an increase in single-family more than offsetting small declines in the mobile family, commercial real estate, and construction loan categories. Current credit quality is holding up very well, and you'll note that there was just $3,000 of early stage delinquency balances at June 30, 2022. Additionally, non-performing assets decreased to just $1.4 million, which is down from the $2 million on March 31, 2022. Please note that decline and non performing assets and primary the result of forbearance loans previously downgraded to TDR non equitable status. That were subsequently upgraded to performing status, given their satisfactory payment performance and compliance with the terms of their forbearance. As of June 30 of 2022 there were no loans and forbearance. Previously, on March 31st, 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 $411,000 negative provision for loan losses in the June 2022 quarter. The allowance for loan losses to gross loans held for investment decreased to 59 basis points on June 30, 2022, from 66 basis points on March 31. 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 32 basis points for the quarter ended June 30th, 2022, compared to the March 2022 sequential quarter as a result of a 32 basis point increase in the average yield in total interest earning assets and a one basis point decrease in the cost of total interest bearing liabilities. Notably, our average cost of deposits declined by one basis point to 11 basis points for the quarter in the June 30, 2022, compared to 12 basis points in the prior sequential quarter. Additionally, our borrowing costs were unchanged in the June 2022 quarter compared to the March 22 quarter. The 2.93 percent net interest margin this quarter was positively impacted by approximately 11 basis points as a result of lower net deferred costs loan costs associated with fewer loan payoffs in the June 2022 quarter in comparison to the average net deferred loan cost amortization of the five previous quarters and the $94,000 deferred loan fee recovery from a legacy restructured loan that paid off this quarter. We expect that near-term future quarters will also benefit from fewer loan payoffs as a result of higher mortgage interest rates. New loan production is being originated at higher mortgage interest rates than our recent prior quarters, and adjusted floor rate loans in our portfolio are now adjusting to higher interest rates in comparison to their existing interest rates. Also, for multifamily and commercial real estate loans, the loans are adjusting above their existing floor rates. These factors suggest that our net interest margin will continue its near-term expansion. We continue to look for operating efficiencies through the company to lower operating expenses. Our FTE count on June 30, 2022 increased to 162 compared to 161 FTE on the same day last year. Very small increase. You will note that operating expenses declined to $6.4 million in the June 2022 quarter from the stable run-up rate of approximately $6.9 million per quarter. Operating expenses declined as a result of a $198,000 recovery from the supplemental employee retirement plans stemming from a higher discount rate used to calculate the benefits, $136,000 refund from a vendor on a previously paid network service invoices that were overstated when billed, and a $30,000 refund on previously paid employment taxes, among other adjustments. We expect a return to the stable run rate in fiscal 2023 and anticipate a bit of pressure on operating expenses as a result of increased wages and inflationary pressure on other operating expenses. 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 the 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 lower yielding average balances of investment securities and interest earning deposits. The total interest bearing liabilities composition also improved in the interest increase in the average balance of deposits, which outweighed the slight increase 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. We also recognize that prudent capital returns to shareholders through stock buyback programs is a valid capital management tool, and we purchased approximately 35,000 shares of common stock in the June 2022 quarter. For the fiscal quarter, we paid approximately $4.1 million of cash dividends to shareholders and repurchased 257,285 shares of common stock for approximately $4.3 million. Our capital management activities resulted in a 93% distribution of fiscal 2022 net income. We encourage everyone to review our June 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 have regarding our financial results. Thank you. Alan?

Ladies and gentlemen, if you do have questions, please press 1 then 0 on your touchtone phone. You'll hear an indication you've been placed into queue, and you may remove yourself from the queue by repeating the 1, then 0 command. If you're using a speakerphone, we ask that you please pick up your handset and make certain that your phone is unmuted before pressing any buttons. Again, for questions, press 1, then 0 at this time. We'll first go to the line of Nick Couturelle with Piper Sandler. Go ahead. Good day, Craig and Donovan. How are you?

Very good morning. Good morning.

It looks like originations and purchases in the multifamily segment were about half of what they were in the late quarter. Now, based on your commentary and the prepared remarks of tightening conditions in that space, would you expect the composition of originations and purchases to remain tilted towards single family in the near term?

Nick, yeah, I think there is a little bit of an expectation here that the Origination volume is swinging toward single-family production in contrast to multifamily and commercial real estate. Although I would also point out that all origination channels or products are a bit tighter right now as a result of rising interest rates. That's why we've suggested that we would probably decrease sea origination volume in the mid-range of what we've done over the past four, five, six quarters or so. Noticing with respect to payoff volumes, single-family payoff volumes are significantly down from where they were as a percentage of total payoff volume. And in fact, we're seeing a higher percentage in multifamily primarily, even though total payoff volume is down both in sequential quarter and in comparison to the range that we've seen over the past four, five, six quarters.

That's great, Collar. Thank you. If I understand the release correctly, it looks like you ceased repurchasing shares in April. Can you share with us your thoughts on the buyback, and is the slowdown driven by a desire to save more dry powder for increased on-demand?

Well, it's not necessarily a function of saving dry powder per se, although that is top of mind with respect to our ability to potentially grow balance sheet. But In our prepared remarks, we described that we distributed approximately 93% of our net income for the fiscal year by way of cash dividends and stock repurchases. So to the extent we get around 100% of net income being distributed, that's about what we forecast with respect to that activity for any fiscal year.

Thank you for taking my questions.

And next, we'll go to the line of Tim Coffey with Jani. Go ahead, please. Thanks. Morning, gentlemen. Morning.

Good morning. So is there any way you can kind of quantify the impact to NIM from slower loan payoffs? Because in previous quarters, it's been a drag. because the payoffs have been so big. But as they start to slow, is there any way to kind of quantify that impact and the benefit?

Sure. I mean, we describe what total payoff volume is in any given quarter. And then additionally, we describe what the net deferred loan cost amortization is for that quarter. which is largely driven by the increase or decrease in payoff volume. And with payoff volume declining so sharply, you see that the net deferred loan cost amortization came down additionally. So for the June quarter, net deferred loan cost amortization was $191,000. In the March quarter, net deferred loan cost amortization was $496,000. So by nature of that lower payoff volume, we will see lower net deferred loan cost amortization, and that's a large driver with respect to what net interest income will do as well as what the net interest margin will do. The other thing I would add, Tim, when we think about our loan portfolio, it is primarily comprised of adjustable rate mortgages. We also described in the prepared text that we are busting through the floors, which are primarily in multifamily and commercial real estate products. So as the indices have risen and as these loans have come up for adjustment, they are adjusting upward. And just to give you a bit of color on that, in the September quarter, we have modeled approximately $101 million of our loan portfolio that will be repricing upward. And we have modeled based upon June 30 data that that $101 million will be adjusting upward by approximately 82 basis points. In the December quarter, we have another approximately $76 billion of loans that are slated for adjustment. And we have modeled, again, based upon our June 30 data, that that $76 million will be adjusting upward by approximately 89 basis points. So when we think about net interest margin, we have the adjustable rate mortgage portfolio that is adjusting upward and busting through the floors contained in multifamily and commercial real estate. We have a remixing of the balance sheet and moving out of cash and investment securities and using those cash flows for the loan portfolio at higher yields. And then additionally, we're growing the loan portfolio at new higher yields or rates, which also adds to positive impact to net interest margin. And this is occurring at the same time that our funding costs are essentially flat. In fact, I think they're down one basis point in the June quarter in comparison to the March quarter. So that's really what's supporting the growth in our net interest margin. I would also suggest that the 32 basis points of increase in the June quarter relative to the March quarter is higher than what we've seen historically. And it wouldn't surprise me that even though we expect net interest margin to expand as we think about, you know, the near-term quarters or near-term future quarters. I don't know that we would expect another rise of 32 basis points in the near-term future quarters, even though we expect an increase.

Okay. Okay. That's great, Tyler. Thank you, Donovan. And then the other side of that is what are your expectations for deposit beta?

Well, to date, we've not seen an increase in deposit costs. We, as many others, have been holding out with respect to increasing our deposit rates. But as we think about the near-term future quarters, we're obviously going to experience more pressure to raise deposit rates as every other financial institution is going to experience. And so we would expect deposit costs to increase as we look out to the September and December quarters, for instance, although I do not expect to see the type of deposit beta that we've seen in some other institutions, perhaps. But again, I think there's no denying that deposit costs are going to increase And if I think about overall funding costs as well, and primarily in borrowings, we have $20 million of federal home loan bank advances maturing in the September quarter. The weighted average cost of those advances are 175 basis points. If we replace those advances, which we probably will be doing, those advance costs are probably going to double into, you know, call it 350 basis points on that $20 million as it matures and gets replaced. So, yeah, we're going to see pressure on funding costs like everybody, but when we think about deposit beta and we think about our deposit composition, you know, primarily retail or consumer stocks, We don't see as much pressure as many others who may have deposits from our business deposits or other institutional deposits, which I think will feel more pressure than we will feel.

Okay. And then just one final question. Where do you feel comfortable with the loaner deposit ratio? Is there an upper bound? Or rather, what is your upper bound?

Yeah, I mean, historically, we've had loan-to-deposit ratios above 100%. We're getting close to that mark again. We're not uncomfortable, given the composition of the balance sheet and the products we're lending on, meaning mortgage loans rather than CNI or other types of loans. to exceed that you know we're looking at it within the context of interest rate risk management and in fact we like to use federal home loan bank advances which generally in most markets will provide a funding mechanism of a longer term nature in contrast to us being able to access that type of funding from our deposits So, you know, going above 100% loan deposit ratio is not really a significant concern for us, provided we're funding it in such a way that recognizes the repricing characteristics and term characteristics of the assets. Okay.

All right, great. Well, thank you very much. Those are my questions.

And ladies and gentlemen, if there are additional questions, please take this opportunity now to press 1, then 0 on your touchstone phone. And gentlemen, we have no other questions in queue.

All right. Well, if there's no other questions, I look forward to speaking with everyone again next quarter. Thank you.

Ladies and gentlemen, this conference is available for replay beginning today, July 27, 2022, at 7 p.m., and lasting until August 3, 2022, at midnight. You may access the AT&T replay service by dialing toll-free 866-207-1041. Internationally, area code 402-970-0847. and entering the access code 550-0963. Those numbers, again, are toll-free, 866-207-1041, international, 402-970-0847. The access code is 550-0963. That will conclude your conference call for today. Thank you for using AT&T Teleconference Service. You may now disconnect.