Provident Financial plc

Ladies and gentlemen, thank you for standing by, and welcome to the first quarter earnings call. At this time, all participants are in a listen-only mode, and later we will conduct a question-and-answer session. Instructions will be given at that time. Should you require assistance during the conference, please press star, then zero, and an operator will assist you offline. As a reminder, today's conference is being recorded, and I would now like to turn the conference over to our host, Mr. Craig Blunden. Please go ahead, sir.

Good morning, everyone. This is Craig Blunden, Chairman and CEO of Providence Financial Holdings. And on the call with me is Donovan Turnus, 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, 2022, 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 first quarter results. In the most recent quarter, we originated $84.6 million of loans held for investment, a small decline from the $85.9 million in the prior sequential quarter. During the most recent quarter, we also experienced $31.7 million of loan principal payments and payoffs, which is down from $41.3 million in the June 2022 quarter and at the lower end of the quarterly range. Currently, competition remains elevated for loan originations, and it seems that many borrowers have reduced their new activity as a result of rising mortgage interest rates. Additionally, we're seeing more demand for single-family adjust rate mortgage products as a result of higher fixed rate mortgage interest rates. For the most part, our underwriting requirements have not changed, but certain loan products such as retail and office CRE remain somewhat tighter than other CRE products. Additionally, our single-family and multifamily pipelines are modestly smaller in comparison to last quarter, suggesting our originations in the December 2022 quarter will decline from this quarter, but still remain within the range of recent prior quarters, which has been between $60 and $95 million. For the three months ended September 30, 2022, loans held for investment increased by approximately 6% as compared to June 30, 2022, ending balances with increases in single-family and multi-family loans more than offsetting small declines in the commercial real estate and construction loan categories. Current credit quality is holding up very well, and you will note that there are just 1,000 dollars worth of early-stage balances as of September 30, 2022. Additionally, non-performing assets decreased to just $964,000, which is down from $1.4 million on June 30, 2022. We recorded a $70,000 provision for loan losses in the September 2022 quarter. The allowance for loan losses to gross loans helper investment decreased to 57 basis points on September 30, 2022, from 59 basis points on June 30. You will note that we remain on the incurred loss model and have not adopted CECL. It means that our allowance methodology cannot be reasonably compared to CECL adopters. Our net interest margin expanded by 12 basis points for the quarter ended September 30, 2022, compared to the June 22nd sequential quarter as the net result of an 18 basis point increase in the average yield on total interest earning assets and an eight basis point increase in the cost of total interest bearing liabilities. Notably, our average cost of deposits increased by just two basis points, to 13 basis points for the quarter ended September 30th, 2022, compared to 11 basis points in the prior sequential quarter. Additionally, our borrowing costs increased 13 basis points in the September 22 quarter compared to the June 2022 quarter. The 3.05% net interest margin this quarter was positively impacted by approximately four basis points as a result of lowered net deferred loan costs associated with fewer loan payoffs in the September 22 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 higher mortgage interest rates than prior recent quarters, and adjustable 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, 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 throughout the company to lower operating expenses. Our FTE count on September 30, 2022, decreased to 160 compared to 164 FTE on the same date last year. You will note that operating expenses increased to $6.9 million in the September 2022 quarter, consistent with a stable run rate of approximately $6.9 million per quarter. We expect a similar run rate for the remainder of fiscal 2023, but also anticipate some 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're very successful in execution this quarter with loan origination buy-ins at the higher end of the quarterly range and loan payoffs at the lower end of the quarterly range. Total interest earning assets composition improved during the quarter with an increase in the average balance of loans receivable and decreases in lower yielding average balances of investment securities and interest earning deposits. However, the total bearing liabilities composition deteriorated a bit with a small decline in the average balance of deposits and an increase in the average balance of borrowings. We exceed well-capitalized 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 repurchased approximately 50,000 shares of common stock in the September 2022 quarter. For the fiscal year to date, we distributed approximately $1 million of cash dividends to shareholders and repurchased shares of common stock cost approximately $723,000. As a result, our capital management activities resulted in an 83% distribution of year-to-date fiscal 2023 net income. We encourage everyone to review our September 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 may have regarding our financial results. Thank you.

Thank you. And ladies and gentlemen, if you would like to ask a question, please press 1 and then 0 on your touchtone phone. You will hear an acknowledgment that you've been placed into queue. And you can remove yourself from Q at any time by repeating the 1-0 command. If you're on a speakerphone, please pick up your handset before pressing the numbers. Once again, for questions, please press 1, then 0 at this time. Our first question will come from the line of Nick Cotralli of Piper Sandler. Please go ahead.