Q3 2020 Earnings Call
Ladies and gentlemen, thank you for standing by welcome.
To the third quarter earnings call.
This time all participants are in listen only mode and later, we will conduct a question and answer session instructions will be given to you at that time. If you should require assistance from an operator offline you May press the Star then zero.
As a reminder, this conference is being recorded today, it's now my pleasure to turn the conference over to our host Chairman and CEO Mr. Craig Blunden. Please go ahead Sir.
Thank you good morning, everyone says, Craig Blunden, Chairman and CEO problem and that's the holdings.
And on the call wouldn't be donovan's hurdles or president and chief operating and Chief Financial Officer.
We do hope that all of you.
Doing well things right.
During the.
Hello.
Economic crisis.
Before we begin I'll be brief administrative I've come to a drill.
Our presentations today, but Scott the company's business outlook.
Include forward looking statements.
Well, let's include descriptions of mileage plan.
Objective for gold for future operation <unk>.
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Workout and that's for other formats.
And statement about the company's general outlook for economic.
Condition.
We also may make forward looking statements during the question and answer Korea following management's presentation.
These forward looking statements are subject to a number of risk and uncertainties and actual results may differ materially from those go Scott today.
Information under risk factors that could cause actual results could differ from any forward looking statement is available earnings release it was distributed yesterday.
The annual report on form 10-K for the year ended June 30, 20 lighting and from the form 10-Q, it's another FCC filings that are well subsequent to the form 10-K.
We're looking statements or effective only out the big.
A copy assumes no obligation to update this information.
To begin what thank you for because then you will recall I hope that each of you as had opportunity to review our earnings release, which describes our third quarter. So.
And the most recent quarter, we originated purchased $28.8 million of loans held for investment.
Decreased from $81.6 million in the prior sequential quarter.
During the quarter, we also experienced $55.7 billion the ball reps for pre payment and Hey Hall.
That's down from $65.2 million at December 20 nights in quarter.
It's still tempering the growth rate up won't sell though.
In the March 2020 quarter, there were two long purchase packages from different sellers that we did not double.
Fortunately, we could not complete our due diligence on individual schools with our underwriting requirements.
And we could not it seems that affected production to the whole loan sale in servicing agreement.
Additionally, we canceled another long purchase packet scheduled for April settlement or the same rate.
It's very difficult could get comfortable purchasing loans from others in the current environment.
For the three months ended March 31, 20, Twond he loans held for investment decreased by approximately 3% <unk>. That's at December 31 29.
With declines in all loan categories.
New loan production is uncertain for California lenders because of the sheltered home constrained.
And the difficulty in upgrading certain underwriting documents such as.
Verification of employment <unk> tax transcripts among others.
We're very pleased with the current credit quality and you'll note that early stage delinquency balances were $2.8 million at March 31st 20 Twond.
In addition, nonperforming assets remain at very low level.
And our just $3.6 million, which is down from about $6.1 billion at March 31 2090.
41%.
Line during the course of a year.
However, the recent situation regarding the pandemic will certainly help negative implications for future law credit quality.
Although there are certain what those implications maybe.
We're currently working with our borrowers to provide payment or barrel of up to six month.
The forbearance amount will be they want payable in all of the balloon payment and the whole loans for or sooner if alone becomes due and payable in full earlier date.
We believe our forbearance plan won't be the broad criteria promulgated by the hair.
The inter agency regulatory guidance and clarifying statements from the financial accounting standards Board and the Securities Exchange Commission.
As a result, we anticipate we will qualify for the favorable revision cited in the guidance.
Although the close of business on April 24, we appeal to approximately 99 single family forbearance requests by number.
Or $46.2 million by dollar amount.
And approximately 89 bold family commercial real estate loan request slide number or 64.9 million dollar amount.
For single family, we are processed approximately 13 hours worked well.
In eligible requests into withdrawn requests.
Additionally for multifamily commercial real estate business loans.
We are processed approximately two hours or well Ken in eligible requests denying withdrawn requests.
Could tell from the numbers or slot many requests to process well, yes, that's right we will be completed by mid may.
We recorded an 874000 dollar well loss provision in the March 2020 order.
Primarily due to a qualitative components established our allowance for loan losses methodology.
Oh, sorry in response to the pandemic, which has negatively impacted the current economic environment.
No we remain on the incurred wall model and if not adopted sequel.
This means that our allowance methodology cannot be reasonably compared to see well adopters.
I also wish to refer you to fly 13 that were investor presentation, specifically, what the right.
The commercial real estate table.
No no describes the composition of our commercial real estate secured loan portfolio ample balances that may be considered higher risk and the current environment.
Our net interest margin compressed by 23 basis points for the quarter ended March 31, 2020 compared to the same quarter last year.
That's what are your goal of about 22 basis point decrease in the average yield on total interest, earning assets and a one basis point increase the clock.
Interest bearing liabilities.
Our average cost of deposits decreased by three basis points to 36 basis points for the quarter ended March 31, 2020 compared to the same quarter last year.
Lighting, the strength and value of our deposit franchise.
The 3.3% net interest margin this quarter was negatively impacted by approximately eight basis points. That's really it's all of the increase in average station of the net deferred loan costs.
It is what the loan payoffs in the March quarter in comparison to the average net deferred loan costs amortization look pretty good five quarters.
Our noninterest expenses have declined significantly as a result scaling back or operations regarding the origination saleable single family mortgage alone.
Notably our Eke out on March 31, 2021.
It was 183 compared to 298, though he he on the same day last year.
Now we have Ken your loan production off the one less retail banking center in comparison to the think time last year.
As a result operating expenses declined approximately 7.5 <unk> dollars <unk> or.
Compared to approximately $13 million to the same quarter last year.
However, it should be noted that we incurred approximately $1.6 million onetime costs in the March 29 quarter last year located what the scaling back of the origination salable single family loan.
Additionally, on a sequential quarter basis.
Operating expenses declined approximately one basis point as the result of the declines in salaries and employee benefits in app occupancy or not.
Partially offset by increases in equipment and professional expenses.
Our search Armstrad your balance sheet management is unchanged from last quarter.
We believe that re leveraging the balance sheet with prudent loan portfolio growth as the best course of action by executing on that strategy in the current environment.
May prove very difficult.
We exceed well capitalized capital ratios by a significant margin, allowing for up to execute on our business plan and capital management goals without complication.
We believe that maintaining our cash dividend is very important to shareholders and doing so takes priority over buyback activity.
Nonetheless, we repurchase approximately 47000 shares of common stock in the March 2020 quarter.
Which emphasize the safeguarding cap was becoming increasingly important now the current environment and as to why is this course of action until we can get better clarity on the current economic landscape.
We encourage everyone to review our March 31, Investor presentation posted on our website.
You will find that we included flights regarding financial metric.
The quality and capital management, which we believe we'll give you additional insight our strong financial foundation supporting the future growth of the company.
We will now entertain any questions you may have regarding our finance for you. So.
Thank you.
Ladies and gentlemen, if you would like to ask a question. Please press one then zero on your.
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You may withdraw your question at any time by pressing the one and zero a second time. If you were on a speaker phone. We ask that you. Please pick up the handset before pressing any numbers. So once again if you had a question you May press, one and see route at this time.
And our first question comes on the line Tim Coffey they'd Janney. Your line is now open Sir Please go ahead.
Thank you Martin gentlemen.
Good morning to Albert.
So Craig but the difficulty you described.
Evaluating a loan packages during the quarter or what is that kind of translate into expectations for loan growth. This year.
Well it [laughter] definitely slowed our expectations field.
Not knowing how long you know we're going to be on the situation a mainly with the issues I'm not only will.
How do we underwrite these properly with you know companies closed down than you know issues with getting documentation IRS and so on but also then.
What possible forbearance that may occur immediately what those loans.
You know that we would purchase loan pool as an example.
So.
You know, it's really hard to say.
Knowing that people are going to be.
One other lenders are going to having these request for forbearance now.
Yeah, so the near future.
Donovan do you ever.
[music].
Yeah, I, probably would kind of reiterate craig's comments in that we would expect it to be lower.
Than.
What weve been able to accomplish in the first six months into the fiscal.
But that things are changing very rapidly for instance, I understand the yesterday, the IRS announced that the reopened their income verification portals, although they are very backlog with respect to putting up the information on Inc.
Come Verifications from tax returns of like but that's a positive and that will move forward.
And then I think the other thing is.
We described.
Not being able to obtain.
Satisfactory provisions in the whole loan.
Sale and servicing agreements.
I think that will change as well as sellers understand that buyers are going to be reluctant as a result of.
The current situation to purchase loans without some protections.
Surrounding forbearance.
And one point of clarity there.
Yesterday or or or perhaps it was the prior day.
We finalized an agreement to purchase a package of loans this quarter.
From another lender and indeed, the other lender had agreed to give us some protection in the agreement with respect to forbearance requests. So I think that the market is responding.
With respect to the current environment, and we will see changes being made.
That will satisfy market participants.
US being one of them, but it's going to be slow to develop. So this will have I think negative implications in the short term with respect to purchase packages.
But ultimately it should shake out the become more routine.
Okay, that's great color. Thank you.
And then what do you see with the potential for refinancing away in your existing loan portfolio given that we are lower rates, but the situation incredibly unique.
Well I think Tim Bob.
We're expecting it would slow down from where it was when these replies were really.
Happening in January February closing in March.
I would expect job.
Everybody's going to be slowed down on that and in fact, the whole system got jammed up with revised which was slowing down the process of closing.
Those applications in the first place so.
You know I guess I think that's just another part of this market even low rates are at historic lows.
It's going to be in there will be a bit fewer revise at least in the near term.
Okay and then if you look at the other side of your interest expenses do you have a Cds maturing the next couple of quarters.
Don maybe you want to get that.
Yeah, Tim Yes of course, we do and then in fact, a in our 10-Q, you will see a GAAP analysis, which will describe.
The incremental Cds that are repricing. So if you refer to the December form 10-Q, you'll be able to see where it is and when we filed the March.
10-Q, you'll see where it is.
And indeed rates are coming down on Cds.
Across the board by market participants.
And we are able to lower our deposit rates on Cds, and we will get some incremental benefit.
Lowering deposit costs as a result of that additionally, I want to add that.
With respect to transaction accounts, we're also seeing that market participants are lowering.
Money market account rates, a checking account rates a transaction accounts.
And even though we're at a very low base with respect to our deposit cost of deposits. We think we will get some relief in that area as well as we go down the timeline here so.
We are going to see I believe our deposit costs and overall, our funding costs come down.
But they may not reprice downward as quickly as some others, who maybe in a higher percentage of Cds.
Or had a higher percentage of.
No money market accounts at higher rates et cetera.
Okay.
And <unk> are you participating in the the paycheck protection program.
No no to them or not so we're not enough SBA lender.
We didn't have the [laughter] staff.
The software.
I understand the reporting and working with L. <unk>. So we have been referring our customers who have called <unk>.
Two non bank lenders helsby lenders that have been able to help them apply and that program and I'll lay off you're watching how smoothly that's gone.
Hi, I'm glad we're not purchase.
Hi.
No actually doesn't make sense.
And then the the the pull back on the buyback program is that off the table for the rest of this year or is it something you'll revisit as we go through the the rest of this year were the rest of whatever we're going through.
Well I'm sure I'm sure, we'll revisit that number one.
Well look at that closely.
As the market changes.
So we'll see.
Donovan do you want to add to that.
Yeah, I think the biggest a thing there is we've not necessarily said that our buyback program is off the table.
At this time, what we've described in the prepared remarks is that we want additional clarity with respect to the current economic situation how quickly businesses open how quickly we get back to a new normal if you will.
And then secondarily, we want more clarity within the context of our own balance sheet.
And what are the current economic environment May mean with respect to loan losses, our preparation for loan losses through provisioning to the allowance.
And the like so.
I don't want to describe that it is off the table I do think it is fair to describe.
That we are pulling back a little bit to understand where we currently are which may mean, you know not as much activity in June without the current economic situation.
But there's still could be some activity depending upon the clarity and comfort we get.
Okay. So those are my questions. Thank you very much.
Thank you.
Thank you, ladies and gentlemen, if he would like to ask a question. Please press, one and see where out at this time I do not have anyone in kids. So if he would like to ask a question. Please press one entity route.
I do have a question at this time can Matthew Clark with Piper Sandler. Your line is now open. Please go ahead.
Hi, good morning.
Good morning Party.
Just on the reserve build this quarter.
Given that you're not under C.. So that's kind of a point in time as of 331 I believe and.
Given the deterioration we've seen in the economy in April it is it fair to assume that we might see had a bigger step up in reserves here this coming quarter or not necessarily.
Donlin.
Wanted to do though Tim Matt Uh Huh.
Yeah, I think it's it's too soon to tell at this point in time, I certainly believe that there.
Isn't implication.
With respect to the current economic environment.
What potentially could occur with respect to loan losses, obviously, that's why you know we.
Provision in the March quarter.
We may come to the same conclusion in the June quarter, but the difference for us between March and June is that we will have a better handle on the number of borrowers that we have placed in a forbearance program.
And there will be more granularity around that.
Which will give us some additional clarity.
Like our reserve build was about 13% by dollar by about 16% as a coverage ratio against loans.
Which is I think right in the ballpark of where non Cecil institutions have come in.
So I think the verdict is out I think.
There is perhaps an implication for additional reserves in the June quarter.
Through provisioning.
But really it's it's it's very difficult ascertain.
On April 29.
What that situation May look like at June 30, when we're closing their books for the fiscal year.
And again the difference between the incurred loss model.
You know that's really based upon current losses, the to determine where that reserve should be.
It's not.
Cecil model, which is the future losses through the terms of the individual loans, which is a much different calculation. So.
Yes, hi, it's very possible that there will be additional provisioning and reserve build but we don't know what those implications are until we get further down the timeline.
Understood.
And then just in the multifamily portfolio.
It looks like you guys provided so good detail in that sort of commercial real estate portfolio in terms of some of the break down there, but in the multifamily piece is there any.
Any of that exposure that might have a retail component to it or.
It said no tried and true yeah.
Yeah, if it's in that multifamily table on slide 13, those are pure multifamily there wouldn't necessarily be retail component.
If it is mixed use such as.
Commercial and residential or retail and office or something of that it would be in the commercial real estate table. So the multifamily table is really straight multifamily.
Okay. Thank you and then on the non purchase seeing.
Yeah. The self originated loan production I guess, how are you thinking about.
Opportunities right now are you tightening standards across the board or certain segments I just wanted to get a sense for how you're thinking about kinda self originated.
[noise] type of loan production.
Sure, Matt Oh, we have tightened standards a bit with respect to single family I think all portfolio lenders have probably done so but not so much that we don't that we think we've we've essentially tightened ourselves out of the market.
But we have tightened a bit.
The issue, though is really how quickly we can process applications through.
Giving or given the underwriting requirements that we have with respect to verifying income employment, you know et cetera et cetera. So.
It's going to be slow, but we think there's opportunity there because on the other hand, the second air market is kind of frozen.
We're not hearing that there is much of a.
Jumbo fixed market right now for instance.
Because there's no liquidity for those that are originating and selling a and as a result for that we think there's perhaps some opportunity with respect to or arm products.
You know provided we can price appropriately and provided we.
Can fulfill the expectations of building a pipeline.
With respect to underwriting and closing loans.
We also think theres opportunity in multifamily commercial real estate and the like.
Perhaps or might be even more opportunity there than in single family because it seems like that's a more liquid market.
I'll spend a single family so we.
We certainly think we can continue to originate but it is going to be difficult in the current environment and tell.
Some of these things.
Normalized.
Understood and then.
Last one from me just on the margin outlook.
Ill be your loan yields came down.
Quite a bit it sounds like there was a little bit of unusual.
Item or activity in there, but the deferred fees, but wondered also if there might have been something unusual and the securities.
Well I'm, just trying to get a sense for the potential.
Margin pressure going forward.
Okay. The.
You're right to.
Point out the that deferred costs, which were higher than kind of a normalized.
Five quarter look back.
And that impacted us by about eight basis points in the March quarter.
Conversely in the December quarter.
We had lower deferred loan costs amortization.
In the prior five quarter look back and that augmented Ah the loan yield in the December quarter by approximately seven basis points. So there was about 15 basis points of play in the difference between the December 31st net interest margin in the mid.
March 31st net interest margin and we can't forecast what that May look like in any given quarter.
Although if we do a experience lower prepayments as we think they occur as a result of Bob bottlenecks in funding new loans, we would expect that there would be fewer a loan payoffs, which then means fewer net deferred loan costs being amortized.
The into the income statement. So we think that could be a net positive other than that though we do have.
An adjustable rate loan portfolio, and then adjust based upon the new indices and the new indicee or the indices or are well below where they were and as a result until we hit floors or until we hit caps, a we will be a reduction or reducing net interest.
Margin as these loan portfolios adjust.
Understood. Thank you.
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Alright, well I want to thank everyone for participating on our quarterly conference call.
And look forward to take into next quarter.
Thank you.
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