Q4 2020 Provident Financial Holdings Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Provident Financial Holdings fourth quarter earnings Conference call.
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I would now like 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 CEO problem Fenichell holdings.
And on the call what feels dongen terminals or president and Chief operating Chief Financial Officer.
Before we get <unk> reef and demonstrate allowed them to address.
Presentation, today's discusses the company's business outlook.
We will include forward looking statements.
All statements include descriptions of management's plans objectives or goals for future operations products or services forecasted financial or other performs measures and statements about the company's general outlook for economic and business conditions.
We also may make forward looking statements during the question to answer period following management's presentation.
These forward looking statements are subject to a number of risks and uncertainties.
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 It was distributed yesterday.
From the annual report on form 10-K for the year ended June 32019.
And from the form 10, Qs and other FCC violins their bile subsequent to a form 10-K.
Forward looking statements are affected only up to date that dominate.
The company assumes no obligation to update this information.
Again, thank you for participating in our call hope that each of you just had an opportunity to review our earnings release, which describes a fourth quarter until school year results.
And the most recent quarter, we originated and purchased $44.2 million of loans held for investment.
An increase from the $28.8 million than the prior sequential quarter.
During the quarter, we also experienced $56.5 million of loan principal payments and pay off which is up slightly from the $55.7 million in the March 2020 quarter and still tempering the growth rate of loans held for investment.
In the June 2020 corridor.
We found it a bit easier to originate purchase loans as a quarter progressed does mortgage markets normalize to some degree. However, we're still cautious regarding single family loan purchase packages, particularly season production because it's difficult to complete due diligence on individual loans consistent with our underwriting requirements.
For the three months ended June 30, 2020 loans held for investment decreased by approximately 1% in comparison to the March 31, 2020 would decline some single family in commercial real estate categories, partly offset by growth in the multi family construction and other loan categories.
New loan production seems to improve California lenders from the March quarter, because many of the pandemic operating constraints have been resolved.
Current credit quality is holding up well.
I'll note that early stage delinquency balances were just $219000 at June 30 2020.
In addition, nonperforming assets remain at very low levels, we're just $4.9 million, which was down from the $6.2 million at June 30, 29 team a 21% decline during the course of the year.
However, the situation regarding that pandemic as fluid that may not have it may have negative implications for future credit quality. Although this fall apart from certain what those applications will be.
We continue to work no borrowers lied payment forbearance of up to six months.
The forbearance amount will be doing payable and fall as a balloon payment at the end of alone term or sooner if the loan becomes due and payable in fall of that earlier date.
We believe part forbearance plan will meet the broad criteria promulgated by the carriers out there.
Inter agency regulatory guidance and clarifying statements from the financial accounting standards Board as the Securities and Exchange Commission.
As a result, we believed that we qualify for favorable provision side. So I did have the guidance.
The vast majority of forbearance malls.
As of June 30, 2020 that were 48 single family loans, and forbearance with outstanding balances approximately $19.9 million or 2.2% of gross loans held for investment and fly multifamily and commercial real estate loans in poor Barents without any balances.
Approximately $2.7 million or 0.29% of gross loans held for investment.
Monthly payments on the majority loans import Barents will not be required to resume until October or November 2020.
Additionally, new request for forbearance has significantly declined from levels experienced at March and April and May.
We recorded a 448000 dollar provision for loan losses in the June 2020 quarter.
Primarily due to the increase in the qualitative components in our allowance for loan losses methodology in response to pandemic, which is net net negatively impacted the current economic environment.
You will note that we remain on the incurred loss model and have not adopted Cecil this means that our allowance methodology cannot be reasonably compared to Cecil adopters.
Also wish to refer you to slide 13 of our Investor presentation.
Specifically, what note five of the commercial and real estate table.
Well no describes the composition of our commercial real estate secured loan portfolio and the balances that may be considered high risk in the current environment.
Additionally.
We populated a new table on slide 13, describing certain characteristics of loans in forbearance.
Our net interest margin compressed by 35 basis points for the quarter ended June 30, 2020 compared to the March 31 sequential quarter as a result of a 41 basis point decrease in the average yields on total interest, earning assets, partly offset by seven basis point decrease in the cost of total interest.
Turning liabilities.
The decline the average yield on total interest, earning assets was primarily the result was a sharp rise in liquidity.
Stemming from the significant increase in total deposits.
And invested that nominal yields.
Our average cost of deposits decreased by six basis points to 30 basis points for the quarter ended June 30, 2020 compared to the March 31st sequential quarter.
We believe further declines are likely given the current interest rate environment.
2.9%.
Interest margin. This quarter was also negatively impacted by approximately seven basis points as a result of the increase in the amortization of the net deferred loan costs associated with a loan payoffs in the June quarter in comparison to the average net deferred loan costs amortization of the five previous.
Quarters.
We can you continue to look for operating efficiencies throughout the company to lower operating expenses.
Notably RFP he count on June 30, 20, Twond. He was 178 compared to 187 today.
50 on the same day last year, a 5% decline.
As a result fewer employees another cost savings operating expenses declined to approximately $6.6 million.
Current quarter compared to approximately $9.7 million in the same quarter last year.
Please note, though the June 2020 quarter benefited from a $575000 reversal of incentive compensation accruals previously expensed in the first three quarters fiscal 2000 each one.
Likewise, it should be noted we incurred approximately $1.2 million one time costs in the June 29 June quarter last year associated with scaling back.
Origination of saleable single family mortgage loans. Additionally, on a sequential quarter basis operating expenses declined by approximately 4% primarily as result of declines in salaries employee benefits equipment and other expenses, partially offset by increases in sales and marketing expenses and upon.
The insurance premiums.
A short term strategy for balance sheet management is unchanged from last quarter, we believe that leveraging the balance sheet with prudent loan growth.
Of course of action to execute these on that strategy strategy in the current environment may prove very difficult, we exceed well capitalized capital ratios by the second niche markets 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 to shareholders.
And doing so trxs takes priority over stock buyback activity as a result, we did not repurchase any shares of common stock in the June 2020 quarter.
And wish to emphasize it safeguarding capital is becoming increasingly important the current environment and as to why is this course of action until we get better clarity on the current economic landscape.
We encourage everyone to review our June 30 of 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 our strong 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, ladies and gentlemen, if you wish to ask a question. Please press one then zero on your telephone keypad.
You may withdraw your question that anytime by repeating the one year old come out.
Once again my questions today.
Please press one then zero at this time.
We do have a question from a lot of Matthew Clark. Please go ahead.
Hey, good morning.
[laughter].
We can you maybe even start with margin or the accelerated amortization sounds like it.
It negatively impacted.
Your your loan yields there a little bit and.
And you know the excess liquidity is significant can you just kind of.
Talk through the puts and takes at the margin as it relates to the excess liquidity a new loan pricing.
Funding the funding size all easier or.
To to kind of see but.
Just on the outside the <unk>.
What the outlook is there.
Sure I'll I'll grab this ah stay out of it a math you.
The largest impact in the June quarter was as you describe the interest earning deposits or the significant increase in liquid assets.
For example, the March quarter, we had approximately 61.9 million.
Interest, earning deposits or overnight deposits if you will.
As investments and that was earning 120 basis points for the quarter.
And then we move into the June quarter, and we see the large rise in deposits that came in during the June quarter.
Which were essentially invested in large part and overnight advances and that the ER overnight.
Deposits and that was 135.1 billion, but the deal drop to 11 basis points. So through the June quarter, we were essentially repositioning that liquidity out of overnight advances into investment securities.
And obviously to the extent to there were slowing growth in the loan growth will vote that actually shrunk up a bit.
So as we think about the remainder of this calendar year in the beginning of our fiscal year.
We're really going to need to redeploy those excess or that excess liquidity.
Primarily into loans is the preference, but then secondarily into investment securities such that the the yields we're earning on those.
Investments are significantly larger than what we did.
The June quarter. So that's the first thing.
And then secondarily as we think about where loan yields are coming onto the balance sheet.
Single family loans are coming onto the balance sheet in the low 3% range.
Multifamily commercial real estate are in the mid to high 3% range.
So we are investing in the low threes to the high threes with respect to new.
Single family multifamily commercial real estate.
Production.
It obviously to the extent that that growth take some of that excess liquidity off the books.
There will be a nice spring with respect to the margin.
As we think about going forward.
And then secondarily the liability side.
As it relates to our cost of liabilities will also get some.
Helpful.
HM.
Forward Oh.
Buyouts, if you will first of all we have about 90 and a half million dollars of Cds.
That are pouring over the next year right now those Cds are probably in the very high 90 to 110 basis point category.
And those are being reinvested at a torti.
In the low 20 basis point category. So we'll get some bounce to margin as we go down the timeline there and then secondarily, we have FHLB advances that are maturing through the course of the year, there's about 30 million.
Of FHLB advances.
And those advances and their cost star in call. It a 257 range.
They will obviously either be paid off with excess liquidity.
Or in the event, we need to the funding we will replace those advances with significantly lower cost of funds. So if I think about our net interest margin we were hit pretty significantly in the June quarter, primarily because of excess liquidity and our job during.
Fiscal 21 is essentially to redeploy that excess liquidity into much higher yielding assets.
And as a result of that I think our net interest margin is probably closer to the bottom of our range than the top of our range auto current basis or a at the June quarter. If you will.
And on the security side, I guess, what do you.
Buying with that excess liquidity to the extent your redeploying it.
It's primarily rate or rate and product.
Yeah, it's primarily in the mortgage backed.
Securities a G.S.C. types.
And it can range from.
Adjustable rate all the way to the fixed rate product.
But we're keeping the average life relatively short, but ultimately we want a cash flow product such that.
We're getting cash flows back to either redeploy into loans also potentially redeploy in this excess liquidity.
One thing to think about as it relates to the excess liquidity.
Much of that excess liquidity was the result of this significant increase in deposits the significant increase in deposits in the June quarter was largely the result of the stimulus programs that were putting money in depositors pockets.
They were then placing them into bank accounts.
Including PPP funds, although we didn't make the loans, we were the recipient and a beneficiary of some of the.
Funding that some of our customers received in the form of deposits one would expect that as we go down the timeline.
That funding will be used by the various businesses and individuals and we'll then be depleting some of the excess deposits.
On our balance sheet as well so we may wish to carry higher.
Liquidity balances than we normally carry a at least over the next quarter or so until we really understand where this excess liquidity coming from this these deposits may land or whether or not their short term or longer term in nature.
Understood Okay.
And then on the single family ready.
Following just loan growth overall.
Yeah the.
Balances terms or the rate of decline load at least on a sequential basis.
Yes, well your thoughts about being able to maintain loan balances or should we continue to expect a little bit of shrinkage.
Well I think on fiscal year basis, we joined up about 3% or annual growth in our loans receivable or loans held for investment.
I would expect that we would also be.
In the.
Low to mid single digits with respect to growth over the course of the fiscal year, but much of that is going to depend upon what the.
Real estate markets look like.
Right now the single family market is primarily driven by a refinance activity into 30 year fixed rate product historically, we've not place that on the balance sheet, Although we may.
Adjust our our position with respect to that as we go through fiscal <unk>.
21, because that's primarily where the market is.
And then secondarily as we think about multifamily and commercial real estate.
There is there may also be an impact with respect to volume or market capacity.
Because it's going to depend upon what the actual economics of the individual collateral or property looks like.
Whether or not they are impacted by kogut thinking with respect to their rents.
And the like so it is conceivable or possible that the opportunity in multifamily commercial real estate goes down as a result of you borrowers essentially not being able.
To refinance or being uncomfortable with purchase activity in the current environment. So.
Our expectation is that we would be probably low to mid single digits with respect to annualized growth in the loan portfolio.
But I think we're going to.
Be impacted as well with prepayment activity again in single family portfolio more so than in multifamily commercial real estate as result of current interest rates.
Okay.
Okay, Great and then on the deferral activity very very low it sounds like the requests have slowed meaningfully as well.
I guess, how are you thinking about the unemployment kind of benefits and stimulus that the government's providing should they kept that get cut is that of a growing concern or.
I know you have low ltvs and all that but just what your thoughts about the potential for deferrals to you know to pick up again.
Well, so far I mean, we're not experiencing.
Significant inquiries with respect to deferrals, we essentially.
Uh huh.
Modified in forbearance.
Those that were coming in.
From April May and June the total numbers are very low with respect to the percentage of our overall portfolio.
There is of course always a possibility that oh requests start increasing again.
Depending upon what occurs with respect to any additional government stimulus programs.
But it's very hard to forecast that Oh, all I would suggest is given what occurred in our balance sheet and what we actually didn't forbearance in the June quarter being significantly lower.
Than what we've seen across the industry. We would have that eight same expectation that in the event. We do see a rise in requests Oh, we're a portfolio would probably fair better than many in the industry.
Particularly if we gauge it against what we saw in the June quarter.
And March quarters in comparison to others in the industry.
Great. Thank you.
Thank you once again for questions. Please first one that narrow at this time. Our next question comes from the line Tim Coffey. Please go ahead.
Thanks, Martin gentlemen.
Good morning.
You know given that the commentary that you just provided on kind of your loan growth outlook for the next fiscal year.
The if it lower levels of originations is that going to have that kind of eliminating the impact on the growth in your non interest expenses.
Well I don't know if it will have.
A limiting impact.
You know we've seen non interest expenses are operating expenses declined significantly.
And then even over the course of this fiscal year.
We saw a RF T E count declined by approximately 5% and we're still looking for opportunities with respect to F. T E count as well as other operating expenses. So I think the first three quarters, we were coming in at about.
Seven and a half million per quarter this fiscal year.
And then if I look at the June quarter, and I adjust for the.
Yeah, 575000 or so.
I'll call it 600000.
A reversal of incentive comp.
That benefited the June quarter that puts us on a run rate of 7.2.
You know 7.3 million a quarter in operating expenses, which is lower than the seven and a half million run rate that we had a in the first three quarters. So our expectation is we're going to be in the low 7 million dollar number for operating expenses over the course of of fiscal.
So 21.
And.
It's not specifically related to loan origination volume per se.
And incentive compensation tied to loan origination volume per se.
Obviously, if volume goes down incentive comp will go down, but I don't know how meaningfully or it will go down in comparison to total operating expenses.
Okay. That's helpful. <unk> and then switching gears over to your non interest income obviously consumer activity has been isn't low relative to historical periods.
And your fees reflect that do you have any kind of visibility on when you might see client deposit or activity start to pick up again.
<unk>.
You know I think that's pretty difficult to forecast.
You know, we're seeing less activity and additionally, well we didn't quantify it we were.
Ah completing some fee waivers in the June quarter as well so there.
Just kind of a twofold impact in the June quarter with respect to non interest income.
Both from the standpoint of reduced consumer activity, but secondarily there was a so fee waivers as well we would expect the fee waivers component.
To go away, but.
You know when consumers began a their activity I think is highly dependent upon when economies open and when consumers are actually out and about and shopping and going to restaurants and movies and the like so I think that's highly dependent upon.
The circumstances around the pin debit.
Okay, all right as I said.
And then in terms of the buyback and <unk> <unk> I heard the commentary you made on on May one to maintain capital but.
There are banks in the last that are starting to approach the regulators about the opportunities to buy back stock if the regulators were to start.
Expressing.
Ability or willingness to for the bags to start buying back stock would that change your view on Henri instituting the buyback at all.
Well.
Yeah, I'll I'll take that one Tim.
Certainly that would be an indicator that.
Would mean, we'd certainly look more favorable we laid out that.
But I just point in time.
Regulators are certainly not.
Looking favorable to buybacks.
So I.
Loved to be interested in hearing.
There's other institutions that have.
Received.
Permission to go ahead and do some limited buybacks certainly yet.
These price levels.
That's really attractive.
But again no worse this economy headed.
And on the next quarter or too.
With the effects on the pandemic on it.
Right Okay.
Those are all my questions. Thank you.
Thanks, Tim.
Thank you there are no question then if you please continue.
Oh, we do another question here from Matthew Clark. Please go ahead.
Hey, sorry, [laughter] on me.
On the origination of 30 year fixed.
Type of product.
Is there an expectation that you might go back to.
Selling loans again and just to.
Create some fee income.
Oh, I think we always have those options open but I don't know got there are definitive plans to scale up the originally to sell model.
But again, depending upon what actually occurs.
With respect to balance sheet growth being priority.
If we find ourselves in the city a situation where.
Oh, we're uncomfortable with the the rate of growth or were uncomfortable with.
The interest rate risk aspects of that growth on balance sheet.
We would certainly consider selling loans, but I don't know that that means it's.
Something that we would jump into in Greece scale significantly from.
You know a consistent with what we did in the past.
Okay. Thank you.
Thank you and we do have a question on the line of Kevin Swanson. Please go ahead.
Hi, guys.
Hi, when it.
I appreciate you guys not being overly act and PDP, because I think we talked about last quarter not having to deal with the FDA and it seems like from a lot of the conference calls.
Around the industry and banks are really focusing on the PPP customers and kind of getting those.
In order and talking with them.
The whole process and and you guys are saved from that a little bit.
Just kind of curious how you kind of view the competitive landscape and those are the banks around you are really focused on those clients and the offer you any offensive capabilities or or just kind of curious how you're.
Kind of structuring your conversations with clients and and just.
Without some of the PPP stress I guess.
<unk>.
Yeah. The activity that we have in PPP has been.
Actually a benefit if you will because we have customers that received PPP loans and centrally deposited those buttons.
In our bank.
Hmm some of the other things that we're hearing a it's not P.P.P. related per se or.
With respect to institutions that are you know focusing on those customers over others.
But we are hearing and we are seeing a from a competitive perspective that some of the larger banks.
Who have closed the many of their branch offices that surround our branch offices.
There's been a level of customer frustration.
And we are routinely seeing a new customer activity, primarily deposit side activity.
Coming into our branch network expressing their discomfort with some of the larger competitors, we have because the branches or are closed the.
And in these markets and so we are seeing some offensive capability with respect to deposit activity.
You know that's a net positive for us within the context to being up or we mix the.
Costing liabilities, if you will so there's a net benefit there with respect to the loan side.
I think everything on the loan side outside of single family refinance activity.
There's been a cautionary note I think all of our competitors.
Have tightened underwriting of a bit when they're thinking about multifamily and commercial I think there's been less activity.
From borrowers in applicants because the environment that we're in and so we're not really seeing anything out of the ordinary there as it relates to competitors and how aggressive or.
Maybe not aggressive they are in that multifamily commercial real estate space.
But certainly there's going to be those that are doing single family refinance.
And are going to see significant volumes, although that's primarily going to be fixed rate driven.
Great appreciate it thanks for taking my question.
Thank you there at all questions in the queue. Please continue.
Well if there are no further questions someone's thank everyone for participating in our call today, and we look forward to talk into next quarter.
Thank you.
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