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?