Provident Financial plc

Thank you for standing by. My name is Aaron and I will be your conference operator for today. At this time, I would like to welcome everyone to the Provident Financial Holdings second quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star followed by the number one again. Thank you. I would now like to turn the call over to Donovan Turnis, President and CEO. Please go ahead.

Thank you, Aaron. Good morning. This is Donovan Turnis, President and CEO of Provident Financial Holdings. And on the call with me is Tam Nguyen, our Senior Vice President 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, 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 of the date that 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 second quarter results. In the most recent quarter, we originated $20.2 million of loans held for investment, an increase from $18.5 million in the prior sequential quarter. During the most recent quarter, We also had $17.8 million of loan principal payments and payoffs, which is down from $23 million in September 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 higher mortgage and other interest rates. Additionally, we are 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 March 2024 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 December 31, 2023, loans held for investment increased by $3.6 billion when compared to the September 30, 2023 ending balances. with small increases in single-family, multi-family, commercial real estate, and construction loan categories. Current credit quality is holding up very well. And you will note that non-performing assets increased to just $1.8 billion, which is up from $1.4 million on September 30, 2023. Additionally, there is just $340,000 of early stage delinquency balances at December 31st, 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 continue to perform well. We have outlined these characteristics on slide 13 of our quarterly investor presentation. You should also note that we have just nine CRE loans for $5 million maturing for the remainder of 2024. We recorded a $720,000 recovery of credit losses in the December 2023 quarter. The recovery was primarily the result of a decrease in the average life of the loan portfolio stemming from the rapid decline in mortgage rates in the December 2023 quarter and higher prepayment estimates. The allowance for credit losses to gross loans held for investment decreased to 65 basis points on December 31st, 2023 from 72 basis points on September 30th, 2023. Our net interest margin declined by 10 basis points to 2.78% for the quarter ended December 31st, 2023 compared to the September 30, 2023 sequential quarter as the result of a 13 basis point increase in the average yield on total interest earning assets at a 24 basis point increase in the cost of total interest bearing liabilities. Notably, our average cost of deposits increased by 19 basis points to 99 basis points for the quarter ended December 31, 2023, compared to 80 basis points in the prior sequential quarter. And our cost of borrowing increased by 18 basis points in the December 2023 quarter compared to the September 2023 quarter. The net interest margin this quarter was not impacted by the net deferred loan costs associated with loan payoffs in the December 2023 quarter in comparison to the average net deferred loan cost amortization of the previous five quarters. New loan production is being originated at higher mortgage interest rates than recent prior quarters. And adjustable rate loans in our portfolio are adjusting to higher interest rates in comparison to their existing interest rates. We have approximately $116.8 million of loans repricing upward in the March 2024 quarter at a currently estimated 87 basis points to a weighted average rate of 7.71% from 6.84% at approximately $86.2 million of loans repricing upward in the June 2024 quarter at a currently estimated 90 basis points to a weighted average rate of 7.82% from 6.92%. Also, for multifamily and commercial real estate loans, the loans are adjusting above their existing floors. However, many adjustable rate loans in all categories are currently limited in their upward adjustment by the periodic interest rate caps. I would also point out that there is an opportunity to reprice the touring wholesale funding downward as a result of market conditions where current interest rates have moved lower in six-month and longer terms. All of this suggests that the current pressure on the net interest margin may soon subside. We continue to look for operating efficiencies throughout the company to lower operating expenses. Our FTE count on December 31, 2023 decreased to 160 compared to 161 FTE on the same date last year. You will note that operating expenses increased to $7.3 million in the December 2023 quarters. somewhat higher than what we described as the stable run rate of $7.2 million per quarter. The increase was primarily due to higher salaries and employee benefits expenses resulting from higher expense accrual adjustments for the supplemental executive retirement plan. For fiscal 2024, we continue to expect a run rate of approximately $7.2 million per quarter as a result of increased wages and inflationary pressure on other operating expenses. In fact, the actual run rate for the fiscal year to date has been $7.1 million per quarter. 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 at this time, as a result of tighter liquidity conditions. We were successful in execution of this strategy this quarter with loan origination volumes at the low end of the quarterly range and low payoffs also at the low end of the quarterly range. The total interest earning assets composition improved from last quarter with a small increase in the average balance of loans receivable and a 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 an increase in the average balance of borrowing. 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 63,000 shares of common stock in the December 2023 quarter. For the fiscal year to date, We distributed approximately $2 million of cash dividends to shareholders and repurchased approximately $1.2 million worth of common stock. As a result, our capital management activities resulted in an 82% distribution of fiscal year-to-date net income. We encourage everyone to review our December 31st 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 that you may have regarding our financial results. Thank you. Aaron?

Thank you. At this time, I would like to remind everyone that in order to ask a question, press star, then the number one on your telephone keypad. We will pause for just a moment to compile the roster. And our first question comes from the line of Andrew Leisch with Piper Sandler. Go ahead.