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. 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 and CEO of Provident Financial Holdings. And on the call with me is Donavon 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 and services, forecasts and 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 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 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 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 pay-offs 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 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 commercial real estate, which remained a bit tighter. Additionally, our single-family and multifamily pipelines were 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 million 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 loans more than offsetting small declines in the multifamily commercial real estate and construction loan categories. Current credit is holding up very well. And you'll note that there were just $3,000 of early-stage delinquency balances at June 30, 2022. Additionally, nonperforming assets decreased to just $1.4 million, which is down from the $2 million on March 31, 2022. Please note that the decline in nonperforming assets is primarily the result of forbearance loans previously downgraded to TDR nonaccrual status that were subsequently upgraded to performing status given their satisfactory premium performance in compliance with the terms of forbearance. As of June 30, 2022, there were no loans in forbearance. Previously, on March 31, 2021, we ended new requests pursuant to our forbearance program. As a result, forbearance loans ran their course as provided in their individual forbearance agreements and are now primarily classified as performing loans with a few remaining in TDR nonperforming status. We reported a $411,000 negative provision for loan losses in the June 2020 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 remained on an 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 30, 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 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 ended June 30, 2020, 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% net interest margin this quarter was positively impacted by approximately 11 basis points as a result of lower net deferred 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. In addition, loan production is being originated at higher mortgage interest rates in our recent quarters and adjustable-rate loans in our portfolio are now adjusting to higher interest rates in comparison to the 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 throughout the company to lower operating expenses. Our FTE count as of June 30, 2022 increased to 162 compared to 161 FTE on the same day last year, a very small increase. You'll note that operating expenses declined to $6.4 million in the June 2022 quarter from the stable runoff rate of roughly $6.9 million per quarter. Operating expenses declined as a result of a $198,000 recovery from the supplemental employee retirement plan stemming from a higher discount rate used to calculate the benefits, a $136,000 refund from a vendor on previously paid network service invoices that were overstated in billing and a $30,000 refund on previously paid employment taxes, among other adjustments. We expect our return to a stable run rate in fiscal 2023 and we 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 for 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 with the interest increase in the average balance of deposits, which outweighed the slight increase in the average balance of borrowed funds. 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 dividend is very important. We also recognize that prudent capital returns to shareholders through a stock buyback program is a valid capital management tool and we repurchased approximately 35,000 shares of common stock in the June 2020 quarter. For the fiscal quarter, we paid approximately $4.1 million in 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 30 investor presentation posted on our website. You will find that we included slides regarding the financial metrics, asset quality and capital management, which we believe will give you additional insight into 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.

Good day, Craig and Donavon, how are you?

Very good. Good morning.

Good morning.

It looks like originations and purchases in the multifamily segment were about half of what they were in the linked quarter. Based on your commentary in 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, yes, I think there is a little bit of expectation here that the origination volume is swinging towards single-family production in contrast to multifamily and commercial real estate. Although I would also point out that all origination channels for core products are a bit tighter right now as a result of rising interest rates. That's why we've suggested that we would probably see origination volume in the mid-range of what we've done over the past four, five, six quarters or so. I would just think, 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 the sequential quarter and in comparison to the range that we've seen in the past four, five, six quarters.

That's great color. Thank you. If I understand the release correctly, it looks like you ceased off purchasing 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 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 the 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 what we forecast with respect to that activity for any fiscal year.

Thank you for taking my questions.

Thanks. Morning, gentlemen.

Morning.

Morning.

So is there any way you can kind of quantify the impact on NIM from the slower loan payoff? 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 on 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 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 readjusting upward by approximately 82 basis points. In the December quarter, we have another approximately $76 million of loans that are slated for adjustment. And we have modeled, again, based upon our June 30 data, 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 of 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 1 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 the near-term quarters or future - 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. That's great color. Thank you, Donavon. 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 overall funding costs as well and primarily in borrowings, we have $20 million of Federal Home Loan Bank advances maturing in the September quarter for which the weighted average cost of those advances is 175 basis points. If we replace those advances, which we probably will be doing, those advance costs are probably going to double to around 350 basis points on that $20 million as it matures and gets replaced. So yes, 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, primarily retail or consumer, we don't see as much pressure as many others 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 loan-to-deposit ratio? Is there an upper bound?

Well, rather, what is your...

Yes. 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 C&I or types of loans to exceed that. 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 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 gentlemen, we have no other speakers, we have no other questions in queue.

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

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