Provident Financial plc

Ladies and gentlemen, thank you for standing by and welcome to the Provident Financial Holdings first 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. 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 will now turn the conference over to our host, Chairman and CEO, Mr. Craig Blunden. Please go ahead, sir.

Thank you. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings. And on the call with me is Donovan Ternus, our President, Chief Operating and Chief Financial Officer. Before we begin, I have a brief administrative item to address. Our presentation today discusses a 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, 2023, 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 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 result. In the most recent quarter, we originated $18.5 million of loans held for investment, a decline from the $24.3 million in the prior sequential quarter. During the most recent quarter, we also had $23 million of loan principal payments and payoffs, which is down from the $25.1 million in the June 2023 quarter and still at the lower end of the quarterly range. Currently, it seems that many real estate investors have reduced their activity as a result of rising mortgage and other interest rates. Additionally, we're seeing more consumer demand for single-family adjustable rate mortgage products as a result of higher fixed rate mortgage interest rates. We have generally tightened our underwriting requirements and increased our pricing across all of our product lines as a result of higher funding costs, the current economic environment, and tighter liquidity conditions. Additionally, our single-family and multifamily loan pipelines are similar in comparison to last quarter, suggesting our loan originations in the December 2023 quarter will be similar to this quarter and at the lower end of the range of recent quarters, which has been between $19 and $85 million. For the three months ended September 30, 2023, loans held for investment declined by $5.5 million when compared to the June 30, 2023, ending balances with declines in mobile family and commercial real estate, 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 non-performing assets increased to just $1.4 million, which is up slightly from the $1.3 million on June 30, 2023. Additionally, there's just $74,000 of early-stage agency balances at September 30, 2023. We are aware of the mounting concerns regarding commercial real estate loans, but are confident that the underwriting characteristics of our borrowers and collateral will perform well. We have outlined these characteristics on slide 13 of our quarterly investor presentation. You should also note that we have no CRE loans maturing during the remainder of calendar 2023, and have only nine CRE loans for $5 million maturing in calendar 2024. We recorded a $545,000 provision for credit losses in the September 2023 quarter. The provision was primarily the result of an increase in the average life of the loan portfolio stemming from the highest mortgage rates in approximately 23 years and lower prepayment estimates. The allowance for credit losses to gross loans held for investment increased to 72 basis points on September 30, 2023, from 55 basis points on June 30, 2023. You will note that we adopted CECL on July 1, 2023, resulting in a $1.2 million increase in the allowance for credit losses, an $824,000 decrease in equity, a $346,000 increase in deferred tax assets, and a $28,000 decrease to the mark-to-market adjustment on loans held at fair value. Our net interest margin was unchanged at 2.88% for the quarter ended September 30, 2023, compared to the June 30, 2023 sequential quarter as the result of a 17 basis point increase in the average yield on total interest earning assets and an 18 basis point increase in the cost of total interest-bearing liabilities. Notably, our average cost of deposits increased by 18 basis points to 80 basis points for the quarter ended September 30, 2023, compared to 62 basis points in the prior sequential quarter. And Our cost of borrowing increased by seven basis points in the September 2023 quarter compared to the June 2023 quarter. The interest margin this quarter was favorably impacted by approximately one basis point as a result of lower net deferred loan costs associated with loan payoffs in the September 2023 quarter in comparison to the average net deferred loan cost amortization of the five previous quarters. New loan production is being originated at higher mortgage interest rates than recent prior quarters, and adjustable rate loans in our portfolio are now adjusting to higher interest rates in comparison to the existing interest rates. We have approximately $88.8 million of loans repricing upward in the December 2023 quarter at a currently estimated 82 basis points to a weighted average rate of 7.35%. from 6.53% and approximately $102.8 million of loans repricing upward in the March 2024 quarter at a currently estimated 102 basis points to a weighted average rate of 7.79% from 6.77%. Also, for multifamily and commercial real estate loans, the loans are adjusting above their existing floor rates. However, many adjustable rate loans in all categories are currently limited in their upward adjustments by their periodic interest rate caps. We continue to look for operating efficiencies throughout the company to lower operating expenses. Our FTE count on September 30, 2023 decreased to 158 compared to 160 FTE on the same date last year. You will note that operating expenses decreased to $6.9 million in the September 2023 quarter, somewhat lower than what we described as the stable run rate of $7.2 million per quarter. The decrease was primarily due to lower salaries and employee benefits expenses, resulting from no quarterly or annual bonus expense accruals in the September 2023 quarter, since the company missed the threshold bonus targets for the quarter. For the fiscal 2024, we expect a run rate of approximately $7.2 million per quarter as a result of increased wages and inflationary pressure on other operating expenses. Our short-term strategy for balance sheet management is somewhat more conservative than last fiscal year. We believe that slowing the loan portfolio growth is the best course of action as a result of tighter liquidity conditions. We were successful in execution this quarter with loan registration volumes at the lower end of the quarter range and loan payoffs also at the lower end of the quarter range. The total interest earning assets composition was very similar to last quarter with a decrease in the average balance of loans receivable and a similar decrease in the lower yielding average balance of investment securities. However, the total interest-bearing liabilities composition deteriorated some with a decrease in the average balance of deposits and a small 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 responsible capital management tool. And we repurchased approximately 36,000 shares of common stock in the September 2023 quarter. For the fiscal year to date, we distributed approximately $981,000 of cash dividends to shareholders and repurchased approximately $495,000 worth of common stock. As a result, our capital management activities resulted in an 84% distribution of fiscal year-to-date 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 insights 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 wish to ask a question, please press 1 and then 0 on your touch-tone phone. You will hear an acknowledgement that you've been placed into queue, and you can remove yourself from queue 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 and then 0 at this time. Our first question will come from the line of Tim Coffey with Jannie. Please go ahead.