Q2 2020 Earnings Call

Ladies and gentlemen, Thank me standing by and welcome to the Providence second quarter earnings call. At this time all participants on the listen only mode. Later, we will conduct a question answer session and instructions will be given at that time. If he should require often assistance you made you press Star then.

Zero as a reminder, today's call is very recorded I would now I'm trying to call over to your host Mr. Blunden. Please go ahead Sir.

Kevin Good morning, everyone. This is Craig Blunden, Chairman and CEO a problem for National Holdings.

On the call will be installed in China, So president Chief operating in Chief Financial Officer.

Well, we again had 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 non streets plans objectives or goals for future operations products or services workouts 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 discuss today.

Information under risk factors that could cause actual results to differ from any forward looking statement.

Well from the earnings release, it was just attributed yesterday.

From the annual report on Form 10-K for the around at June 30, 20 Monkey.

And from the Form 10-Q 's, and other SEC filings filed subsequent to the Form 10-K .

Forward looking statements are effective only Aston date, the on they tend to complete assumes no obligation to update this information.

To begin what thank you for participating in a call I hope that each of you as had an opportunity to review our earnings release, which describes our second quarter results.

And the most recent quarter, we originated and purchases purchased $81.6 million loans held for investment.

Decrease from the $93.4 million and what part of the sequential quarterly.

The quarter, we also experienced $65.2 million loan principal payments and pay all switches off from the $50.8 million into September 20, <unk> quarter.

Still tempering the growth rate of loans held for investment.

For the three months ended December 31, 2019 loans held for investment increased by approximately 2% in comparison to September Thirtyth, 2019, whats growth and single family and construction loans, but small declines in commercial real estate and multifamily loans.

Competition for new loan production remains aggressive but were successful and augmenting our loan origination activity this quarter with single family in multifamily loan purchases.

We're very pleased with credit quality and you will note that early stage delinquency balances were just mone hundred $86000 at December 30 122.

In addition, nonperforming assets remain at very low levels and are now just $3.4 million, which is down from $6.1 million. After December 31 2018.

43% decline during the course of the year.

We recorded a small 22000 dollar negative provision than December 2019 quarter.

Resulting from a low levels of nonperforming classified assets and no meaningful charge offs for many quarters very pleased with these credit quality results.

Our net interest margin expanded by five basis points for the quarter ended December 31, 2019 compared to the same quarter last year.

As a result of six basis point increase and average yield on total interest earning assets.

And a one basis point includes and the cost of interest bearing liabilities.

Our average cost of deposits decreased by three basis points for the quarter ended December 31, 2019 compared to the same quarter last year.

Over the course of the past 12 months, we've been able to hold the line on the cost of core deposits, highlighting the strength and value of our deposit franchise.

3.59% net interest margin this quarter was augmented by approximately seven basis points as result of decrease and amortization of the net deferred loan costs associated with loan pay offs in December quarter in comparison to the average for the five previous quarters.

In addition, our net interest margin remained at the top end that its range in comparison to our recent prior quarters.

Our net interest expenses.

Our non interest expenses have declined significantly as result of scaling back our operations.

Regarding the origination saleable single family mortgage loans, notably our FTD count on December 30, 120 month to was 184 compared to 340 mine FTD on the same day last year.

10 fewer loan production offices, and one last retail banking center in comparison to the same time last year.

As a result operating expenses declined to approximately $7.6 million than the current quarter.

Approximately $10.9 million in the same quarter last year.

Additionally, a sequential quarterly basis operating expenses were essentially unchanged after adjusting for the $296000 partially vision, although previously expense legal.

Settlement in September 2019 quarter, which was not replicated in December 2019 quarters.

A short term strategy for balance sheet management is unchanged from last quarter.

We believe that re leveraging the balance sheet, but please.

Folio growth as the best course of action.

We exceed well capitalized capital ratios by a significant mortgage and allowing us to execute our business plan and capital management goals without complications.

Although our repurchase activity was limited to approximately 2400 shares of common stock in December 2019 quarter.

We continue to believe buyback activities at wives use of capital.

A plan to continue to execute on the substantial returns of capital shareholders and deployment of cash dividends and stock repurchases.

Greetings, everyone to review our December 31st Investor presentation posted on our website.

You will find that we've included slides regarding financial metrics asset quality and capital management, which we believe we'll give you additional insight on their strong financial foundation supporting the future growth to kind of.

We'll now they're taking your questions you may have regarding our financial results. Thank you.

Kevin.

Thank you, ladies and gentlemen, if you wish gas question. Please press one than zero and your telephone keypad you may have draw your question anytime by repeating the one than zero command, if you're using the speakerphone. Please pick up your handset before pressing the numbers. Once again, if you have a question you may press one than zero at anytime.

One moment please for the first question.

Now once again, if you have a question please press one than zero at anytime.

Okay, we'd have a question from a line of Kevin Swanson. Please state your company name Sir.

A few group.

Yes.

Hi, Kevin Good morning.

It looks like you guys kind of nailed you know kind of a rough guidance on expenses for the quarter I'm just kind of curious how you see that moving throughout the year.

In light of some of the movements. So you talked about thanks.

You know I think the seven and a half.

Million dollar number per quarter.

As a relatively safe forecast I do think we have some opportunity there.

As we adjust.

Our business lines and as we adjust.

What we're doing on.

Origination side of the business for a portfolio.

There's probably not much room as it relates to the deposit side of the business a branch activity or the like.

We don't have any plans to close a branch.

Or anything of that nature.

So the deposit side of the business is probably pretty set but I think theres, a little bit of opportunity, but it's not going to be a significant number. If you will we think the way we are structured phone in F. T E count.

And in the business model.

We can grow assets without increasing expenses.

As a result of that and increasing net interest income.

Great and positive operating leverage on that basis.

Thanks, That's helpful. And then question on the on the margin I think you guys are.

Maybe up five bips from the same quarter last year.

And I kind of the at least the cost of funds was once about study and we kind of consider aside movements as allow included in that year and you're going to see the margin playing out this year Undercounting assumption that maybe the fact does something later on down the road.

Well I.

I think the.

For us with respect to where we are in the margin, it's going to be largely dependent upon what the yield curve does.

Recently, we just inverted again, I think from two to tens or three to tens as a result of the.

Flu virus scare.

We had come out as a reversion later on in the fourth quarter and we saw steepening of the yield curve that ultimately helps us because were lending call. It in the five to seven year.

Area, and we're probably funding ourselves in the six month to two year area.

And anything new coming on the balance sheet is essentially at a lower spread than what our existing.

Our balance sheet looks like so thats kind of give us some margin compression.

Probably but that's all mitigated to some degree by the addressable nature of the portfolio to the extent that there are floors.

In many of our loan so many of our loans or multifamily commercial real estate.

They all have floors right now there's about 370 million of that portfolio that is floored and irrespective of what rates.

To those rates will remain the same.

If rates were to.

Come down from where they currently are so I think theres, a little bit more pressure in net interest margin as we look out into calendar 2020.

And I think that's reflective of where the industry is that.

But in our particular case, we think we have some floors that are in place that will mitigate.

To some degree that pressure and if the shape of the yield curve.

Ends up.

Steepening again that will help us as well as the industry.

Okay. Great. Thanks, that's helpful. And then maybe just finally he does it put up some nice loan growth the past couple of quarters. The provision name is still on a.

On the negative side, just kind of curious how you see credit costs going forward. Thanks.

Well you know credit quality is very good right now for the industry in general and for Us specifically.

Credit quality is excellent and.

You know, it's very difficult to see continued improvement from.

Very good levels.

But we were right in the here because nonperformers have come down.

I suppose nonperformers could go to zero.

And that would help.

But we also have migration out of higher risk or higher factor loans into lower factor loans. So to the extent that we have growth in the balance sheet.

And loan growth would suggest that we would be provisioning for that growth that's not necessarily the case, because we have migration within the different portfolios.

In our loans as a result of that we might be freeing up.

Our provisions.

Our allowance in one category that works to the advantage of growth in another category.

And then additionally, we keep a recovering.

Each and every quarter it seems a small amount which is also providing.

An increase to the allowance without running through the income statement. So.

We think credit quality is very good our outlook for credit quality remains a very good I think as we think about 2020.

The higher the growth rate in the portfolio, yes, potentially we could be providing but maybe not.

In an amount that one would think because we also have rotation in our portfolios from higher factor or higher risk to lower risk.

Great. Thanks, guys appreciate the time.

Thank you Ed Nick's question is from the line one off please.

From the lineup Tim Coffey, Jamie. Please go ahead.

And then.

I must coffee your line is open Sir.

Yeah, I mean now.

Yes.

Okay great.

Gentlemen.

Hi, Mark so the what do you I mean I appreciate the commentary on the.

Forward looking at expenses as versus the expenses as a percentage of earning asset rather of average assets where in the 4% range. When you have the mortgage business. These last few quarters, they've been in a high 2% range.

Given your expectations for for balance sheet growth would you could you see that ratio coming below 2.5% and the next four quarters.

Well it depends upon the rate of growth and the dilemma that you saw.

In the December quarter for instance.

Even though we have very good origination and purchase numbers.

At the same time, we have loan payoffs the highest in quite a few quarters. It was $65.2 million. So the growth rate was tempered significantly as a result of those pay offs.

And because of that it's very difficult understand.

Even though ginning up pretty nice growth rate.

If those pay offs continued to be elevated we're not going to see the growth rate that we would like to see and frankly, we're we're turning a little bit with respect to portfolio growth. So.

The answer is yes, we can see.

Operating expenses come in from where they currently are as a percentage of total assets, but that's going to be dictated by the growth rate that we can join up in our loan portfolios.

Okay, Okay I understand thank you.

Given that rates have started come down again and understand the dynamics of impact on past, but does this provide you an opportunity to remix your deposit book.

I'm, you know I'm not sure.

That it gives us that opportunity.

Because all the way through the rising rate cycle, we essentially didnt.

Change our deposit rates and our deposit costs held very steady through the cycle. So now as rates come down on the short end well.

Our deposit costs aren't really going to come down now the opportunity that is there for us.

He is funding, earning asset growth. So one of the things that was occurring when rates were rising were CD specials and alike.

By competitors, who needed to fund their balance sheets, we weren't in that position at that time.

We may be in that position now because we want to grow balance sheet and so we would have an opportunity perhaps too.

Put Cds on our books, a little bit higher rate than what our existing deposit costs are.

But in a lower rate environment, so that the absolute cost.

Probably doesn't go up like we saw when rigs were rising.

Okay.

And then as their competition.

Your view of the competition for loans in the current rate environment is that kind of where it's been in previous cycles. We have seen on rates you have seen that increased competition.

Yeah, Yeah. This has been.

Competitively speaking this has been very difficult both on the loan side ended deposit side, it's yeah, this extended cycle or economic cycle.

Has put pressure on both sides of the balance sheet.

We don't see that that changes anytime soon in fact it could.

Get a little bit worse, as we think about lower interest rates and lower mortgage rates. So we're kind of in that environment again right now.

And I think as result of that there are many borrowers who are looking to refinance.

And our book of business is not going to be immune.

To that refinance activity, which I think generally speaking is is kind of an industry dynamic.

Okay, Great. Those are all my questions. Thank you very much.

For instance.

No once again, if they are additional questions. Please press one than zero at this time 110 zero.

All right we have no further questions in queue at this time.

Alright, well, then that case and I, thank everyone for being on our call we look forward to.

Speaking with you next quarter. Thank you.

Thank you ladies and gentlemen, this conference call will be available for replay and that starting today at noon Pacific time and will run through February 4th Midnight.

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